Can I claim tax relief on my barn conversion?

I own a large farm with several properties on the estate. One barn is being converted into a house for my son to live in, it was previously used commercially — am I able to claim any tax relief on the conversion?

Tom Trewby, senior manager at Mark Davies, the tax consultancy, says that as the barn is no longer used in your business you will not be able to offset the conversion costs against your farming income for tax purposes.

However, you should be able to deduct these costs when calculating the capital gain on the disposal of the property. It is important that you keep good records to support any claim for tax relief.

If you plan to give the converted property to your son, the gift is treated as a sale at full market value for capital gains tax (CGT) purposes. Any gain arising is taxed at 28 per cent. However, you would be able to deduct the original cost of the land, the original construction costs, the conversion costs and any associated legal fees when calculating the chargeable gain.

If you are married, you may be able to reduce the CGT on the gift by transferring ownership of the barn into your joint names so that your spouse’s annual exempt amount can also be used.

Your son should qualify for exemption from CGT on future capital gains on the barn conversion as long as he uses it as his main home.

The work should be eligible for a reduced VAT rate at 5 per cent. If you are employing a builder, you should ensure they are charging VAT at the appropriate rate.

Alternatively, if you are carrying out the work yourself, you may be able to reclaim VAT paid on materials used on the building and qualifying subcontractor fees.

You will also need to consider the inheritance tax (IHT) implications of the conversion and gift. As the property is no longer used in your farming business, it is unlikely to qualify for either agricultural property relief or business property relief (although relief may still be available if your son is employed in the farming business). So your estate will be exposed to IHT if you die within seven years of the gift. You may want to consider life insurance to cover the potential tax liability.

You should also consider gifting the barn to your son before it is converted and giving him the money to fund the conversion, as the value will be lower which will reduce any potential IHT and CGT charges.

Venetia Taylor, solicitor at Payne Hicks Beach, says the type of tax relief available will depend on whether you exercise your option to treat any dealings with the barn as taxable to VAT, known as “opting to tax”.

If you opt to tax, works on the barn will be liable to VAT at 20 per cent. This will need to be paid to the contractors and suppliers, but your business (assuming it is VAT-registered) will be able to recover it. This may have short-term cash flow implications because you will have to wait for HM Revenue & Customs to repay the VAT following submission of your tax return.

Conversions of commercial buildings to residential use (that have not been opted to tax) qualify for a reduced VAT rate of 5 per cent. This is intended to encourage the sort of development that you are proposing and applies to costs relating to the fabric of the building, the installation of services and sanitary ware and your builders’ labour and materials. It does not apply to costs of architects or surveyors, or the installation of goods that are not building materials, such as carpets or furniture.

You do not say whether you plan to give or sell the property to your son. If you sell and the property has been opted to tax, your son would need to issue you with a VAT 1614D certificate before purchase to avoid being charged VAT on the cost of the property. He would also be liable to stamp duty land tax (SDLT) on any amount that he might pay you. A gift to your son of the property would, however, avoid both VAT and SDLT.

Beware capital gains tax. The conversion might increase the value of your barn tenfold from, say, £100,000 to in excess of £1m. If you give the property to your son while the barn is still used by the farming business then any CGT liability could be postponed (using business assets holdover relief) until a subsequent sale or gift by him. He would then have to handle the conversion himself, using the 5 per cent VAT rate rather than opting the land to tax. The relative cost of both options will need to be considered.

You should also be aware of the inheritance tax aspects of the gift, including the loss of any agricultural or business property inheritance tax reliefs.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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