Barn Conversions And Tax Planning

02 June 2014

There has been much publicity about the current Housing Crisis, and the Government has recognised the need to encourage new housing development. In England ‘permitted development rights’ have been extended to allow more development of farm buildings for residential use. This is a positive move for house buyers, the rural economy and land owners.

However, any property development has substantial tax implications that must be considered at an early stage. These include:

  • VAT – this can range from 20% to 5% to Nil
  • Income tax – this will depend on who owns the property
  • Capital Gains Tax (CGT) – a liability of up to 28% can arise if the property ownership is not planned correctly.
  • Inheritance Tax (IHT) – this can be 40% if the property ownership is not planned correctly.

The type of situation we often see is a family farm owned by a father and farmed in partnership with his son. The farm includes a barn which is going to be converted and occupied by the son. Changing the ownership of the barn to the son before the development could:

  • Reduce the VAT cost from 5% to Nil
  • Reduce any future CGT charge from 28% to Nil
  • Avoid the house forming any part of father’s estate which could reduce the IHT charge from 40% to Nil.

In almost all situations time spent on planning before the development starts will substantially reduce the cost of the development.

Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.

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