Things to consider before changing a building's use

Converting your outbuildings into a money-spinning venture is an attractive option for many - with the premises already in place, a bit of renovation and a lick of paint can mean you are up and running in no time. 
But before you put up the B&B sign or invite a group of artists to hang their watercolours in your new gallery, have you considered the tax implications? These are as important as your renovation budget considerations and acquiring any planning permissions required, and should determine how you proceed.

Five ways to breathe life into redundant buildings

Nick Ferguson, NFU Mutual's senior buildings surveyor, suggests five ways redundant buildings can be turned into a potential source of income.

Barn Conversion

  • Budget in advance as overspending on the conversion could affect your profits when you come to sell the property.
  • Enlist the help of property professionals (architects, bulidings surveyors) who specialise in rural conversions.
  • Ask the local branch of the National Farmers' Union for advice - they have experience in this field.
  • Remember to apply for planning permission from your local authority - you can usually gauge their attitude towards rural conversions from looking at their published planning policy.
  • Choose your building contractors carefully - get several quotations, follow up references and check the firm is financially sound.

Business premises

  • Decide who your end user is going to be before starting the conversion, as this could determine the type of fixtures, fittings and finishes you will need.
  • Comply with all the relevant building regulations - whether you're creating an office or an art gallery.
  • Talk to local letting agents before carrying out the work, to find out which kind of premises are most in demand.  They may also be able to advise you on what's most viable for the local area.
  • Think about access - will it be suitable for your intended users or only accessible by 4x4? And, is there car parking space?

Holiday Let

  • It may be useful to talk to other owners with experience of the holiday market.  A key thing to remember is that holiday lets require ongoing commitment long after the conversion has been completed - such as managing bookings, greeting guests, cleaning and maintenance.
  • Consider your outgoings as well as the income your holiday let will generate - for example, once an outbuilding has been converted into habitable accommodation you will be liable to pay rates to the local authority.  Future running costs can be reduced if you install fuel-saving green features during the conversion.
  • Remember to budget for periods when the accommodation is empty.

Entertainment space

  • Renting out a building for parties, film screenings or other functions can generate much needed income, but hiring buildings out to the public also brings with it additional insurance requirements.  For example, all buildings open to the public must comply with the Disability Discrimination Act, as well as health and safety regulations.  Similarly, adding a kitchen will involve additional legal responsibilities relating to fire safety and food hygiene.
  • Third-party liability insurance will be required.
  • Licences are needed to play music and sell alcohol.

Swimming Pool

  • Creating an indoor swimming pool can increase the value of your property - but you need to factor in maintenance costs.
  • If the public are going to use the pool (for example, if the property is a holiday cottage), you should also be mindful of the additional health and safety implications this will have.  For example, you may need to provide supervision for swimmers, particulary if you're aiming at the family market, and treat and test the water to prevent Legionnaire's disease.

Case Study: Camping Barn

If your barn or outbuilding has a clean, flat floor and is watertight, you may be able to charge walkers, ramblers and cash-conscious tourists to sleep there.  Grayle Butterworth runs the Castle Farm Camping Barn at Middleton-by-Youlgrave, near Bakewell, in Derbyshire.
She said: "Our barn sleeps 12, and we hire it out to groups who want to walk or climb in the countryside around here, and who like the idea of spending the night on a working farm.  Quite often they'll be a couple of families with children, who don't mind roughing it a bit.  We've got one group who've been coming here for the last 15 years.  The accommodation may be basic (bare floor, watertight roof), but it's a lot better than a tent, and at £7.50 per person per night, it provides good value for the people staying here, as well as giving us a bit of useful extra income."

Tax rules you need to consider

NFU Mutual Chartered Financial Planner Sean McCann highlights what you need to know:

Inheritance Tax

A building currently used for agricultural purposes may be eligible for Agricultural Property Relief, so some or all the value may be free from Inheritance Tax.
However, a building converted into an office or workshop and let out is likely to be viewed as an investment rather than a business, in which case the full value may be subject to Inheritance Tax.

Capital Gains Tax

If you are selling a farm building, the potential capital gains tax can be as high as 28 per cent.  If you develop first, HMRC may treat it as a trade and charge higher rates of income tax.  Furnished holiday lets can qualify for favourable capital gains tax treatment, with a few conditions:

  • It must be let on a commercial basis with a view to making profit.
  • Lettings to friends or relatives at zero or nominal rents won't qualify.
  • It must be available for letting for 210 days per tax year, and comercially let for 105 days.

Income Tax

Any income generated by putting your redundant farm buildings to a new use will form part of your (or your spouse's) taxable income.

Tax is complex and depends on your individual circumstances, and the tax rules may change in the future. 

We recommend consulting your local NFU Mutual Financial Adviser for more detailed information.