Diversification – Conversion of farm buildings

Businesses, the country and even the wider world are in uncertain times, although from a farming perspective, there has probably never been such a thing as a ‘certain’ time.

Farming is, however, facing some significant current unknowns; how long will the high input prices continue, will the price of crops remain at the current higher levels and, what will the price of diesel be? How much will machinery cost to replace, will labour be available, how much will need to change in the transition from BPS to ELMS, and what will the associated subsidy
shortfall be?

Many farming businesses have been looking to diversify their activities to maintain and perhaps even bolster finances, with the anticipated overall reduction in subsidies, but also to help smooth cashflows and help support the business in poor farming years.

One of the main focus areas has been the letting of excess property assets, examples being the simple rental of a field for camping, or converting a barn into commercial premises or holiday accommodation. There is, as always, the need for careful tax planning.

Repair vs Capital

It is often thought that a proportion of the renovation costs of a farm building would be repairs in nature, however, if the renovation work is substantial, it would likely be classified
as a capital cost, being a replacement of substantially the whole structure. This treatment as capital could significantly reduce the tax relief available on the money spent.

There is also the question that if the building is dilapidated, is it actually being used in the trade? If not, this could also impact the amount of tax allowable expenditure.

Assuming the building was used in the trade, it conversion into an asset for letting, changes the nature of the asset, such that the initial capital costs would not be allowable for tax purposes
as a repair and perhaps not at all until the building was ever sold.

All is not lost, as some expenditure on the building works could be still be eligible for tax relief, if it qualifies for plant and machinery, or as integral features within the buildings, and
advice should be sought in these areas.

VAT

Assuming the converted property is to be let out in future, the VAT position should not be forgotten.

If a barn is to be let as commercial premises for non-storage purposes, the VAT on the renovations would be subject to the partial exemption rules, and so may only be partially
recoverable, or at worst case not recoverable at all. One way to resolve this is to make an Option to Tax VAT election for the farm building.
This does mean that VAT would need to be charged on the rental income and may be off putting for potential non-VAT registered tenants who would not themselves be able to
recover the VAT charged on the rents. If there is an Option to Tax election in place, VAT would need to be charged should the building ever be sold in the future.

If the building is let for storage purposes, or a decision to go down the furnished holiday accommodation route is made, this would prevent the Option to Tax election from being necessary and the VAT on there-development may be recoverable, however, again VAT would need to be charged on the rental income.

Inheritance Tax

A farm building used in the farming trade should qualify for Agricultural Property Relief (APR) on its agricultural value and Business Property Relief (BPR) for any value in excess of agricultural value. Changing the nature of the asset into that of a let property may result in these inheritance tax reliefs being lost, as the asset would no longer be classified as a trading asset, although with some careful planning, it may be possible to retain 100% Inheritance Tax exemption on the values attributed to these properties.