Make tax your first concern

1 February 2002




Make tax your first concern

Looking to convert a farm building to let to a third party?

Think about tax and financing before you apply for

planning permission, advises FPDSavills Ben Crossman

FARMING is undergoing the greatest period of change since the drive for production after World War II. Never has the economic, government policy and grant aid landscape been so driven towards farmers diversifying to generate income from their farming assets.

Traditionally farmers have seen gaining planning permission as the biggest barrier to establishing an alternative enterprise and this is still the first step on the route to diversification for most people. However, local planning authorities are now recognising that government policy has swung in favour of re-using farm buildings and are beginning to be supportive towards redevelopment.

So it is vital that farmers looking to develop redundant farm buildings are aware of the potential pitfalls presented by the current tax system. They also need to think about the financial implications of such ventures, especially where the aim is to let the end product to a third party.

The granting of planning permission for alternative uses, enabling a third party occupation, is an irreversible trigger that creates:

&#8226 A significant uplift in capital value.

&#8226 A change in the status of the building from agricultural to non-agricultural and in the way it is treated for tax reasons.

&#8226 The generation of Schedule A income and the effects such non-business uses create for tax purposes.

The consequences of such a change can be significant. The uplift in value and the non-agricultural business status of the buildings may remove the benefits of both taper relief and rollover relief for capital gains tax (CGT) purposes so that significant CGT could be owed if the buildings were sold.

Also the tax treatment of the buildings may lead to the loss of agricultural and business property status for inheritance tax (IHT) purposes and the current agricultural and business property reliefs. This is a complex area which should be discussed with an expert before approaching the local planning authority.

So what are the potential effects of this trigger event? Any plans to sell or transfer the buildings to the next generation may incur significant tax charges, possibly wiping out any accrued net income from the buildings.

While avoiding CGT on sale is difficult, it is possible to transfer ownership of the buildings before the planning permission is granted. That means you can do so while the potential value is unrealised and can capitalise on reliefs available from IHT as mentioned above. It may be possible to ring-fence the future net income for a particular purpose (school fees or a retirement fund for example) but this needs to be considered when transferring ownership.

&#42 Financial consequences

As well as the tax consequences of diversification and the potential for considerable tax bills, the conversion of farm buildings is a costly exercise. Before applying for planning permission it is vital to undertake a rigorous financial feasibility study. This is particularly important when the money to fund the works is borrowed.

While the traditional notion of a payback period is a valid measure of viability, remember that the borrowing for such buildings will be for a fixed period, typically 15 or 20 years. Couple this with your long-term ongoing financial obligations (repairs, insurance etc) once the buildings are converted and the financial burden could exceed the income. So it is vital that the buildings income covers the finance repayments and other costs over a set timescale and produces a surplus to be taken as profit or retained to refurbish the building at the end of the period.

Benchmarked cashflow planning is essential to determine whether the proposal will be self-funding or a drain on the existing business. This analysis often results in a major change to the conversion proposals to make them more financially viable. It is much easier to undertake this exercise pre-planning than having to re-apply for significant changes to an existing planning permission.

Before embarking upon any planning negotiations with the local planning authority, farmers should ask themselves a number of questions, which could avoid a good idea becoming an expensive mistake.

&#8226 Is the permission being sought to increase capital value or to generate income?

&#8226 What are the future ownership objectives for the farm and buildings?

&#8226 What is the income to be used for and should it be ring-fenced?

lHow are the conversion costs to be funded and how should they be secured?

&#8226 How financially feasible is the scheme over the useful life of the buildings and length of borrowing period?

The answers to these questions should enable you to consider both how to minimise tax liabilities and answer the fundamental financial feasibility questions. Only once these questions have been answered and advice sought on the detailed tax and financial consequences of the particular proposal should you contact the local planning authority to apply for planning permission.

Ben Crossman is an associate at FPDSavills Wimborne office undertaking rural asset management in the south.

Above and below: Getting planning permission and deciding the design may seem the first consideration when converting a redundant farm building, but tax and finance matters should come first.


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