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Class Q permitted development has been with us since 2014 and allows certain buildings to change from agricultural to residential use. These buildings are often gifted within the family to provide a home, or to reduce the Inheritance Tax exposure of particularly older owners. We do not offer planning advice, but we are often asked to consider the tax implications.

The current position

Generally, we start with a barn which was last used in agriculture but has become redundant. Perhaps it is worth £20,000 for agricultural purposes, and £50,000 on the open market as it stands. With planning permission, perhaps it is would be valued at £150,000.

Currently, it will not easily qualify for Inheritance Tax Agricultural Property Relief as it is not used for agriculture. The modest value means this is not a concern. Gifting the barn as it stands would likely require reporting for Capital Gains Tax purposes as a gift of property worth £50,000. If the barn is no longer in farm use, HM Revenue & Customs could potentially challenge a claim for Capital Gains Tax Holdover Relief, so Capital Gains Tax could be charged on the gift. However, the gift would remove the barn from the donor’s potential Inheritance Tax estate. Any Capital Gains Tax due on the barn would be charged at a maximum of 20%, and payable by the 31 January after the tax year (i.e. the normal tax due date).

What if works have started on the barn conversion?

If planning permission has been granted, and our example barn is worth £150,000, the Inheritance Tax and Capital Gains Tax exposure has increased.
However, if works have actively started, beyond just applying for planning permission, the property being gifted is treated as residential property. Any Capital Gains Tax due on the gift will be charged at 28%, and due within 30 days of the gift completing. I.e. the tax cost has been significantly increased, and speeded up!

What does the new owner hope to do with the barn?

Does the recipient want to develop the barn themselves? Can they afford it? The property title needs to standalone in terms of access etc. so a mortgage can be taken out to fund the works.

If the recipient applies for planning permission and sells the barn on, HM Revenue & Customs (HMRC) may look to charge Income Tax and National Insurance Contributions on a profit made from a trade of property development, rather than seeing it as a Capital Gains Tax matter.

VAT and property is a complex area requiring specific consideration. Different rules apply if the gift was proposed to be to a trust.

Ellacotts specialist Agriculture & Property team can help

We are specialists in advising the rural community with various matters including gifting property and developing/converting barns. Do please contact our expert team if this triggers any thoughts, either your usual Ellacotts contact, or our Agriculture Partner, Helen King on hking@ellacotts.co.uk or 01295 250401.