Farmhouse renovation – what’s tax deductible?
You recently bought a small farm and you plan to renovate the farmhouse, which you and your family will then occupy as your home. You have been told you can claim a tax deduction for 70% of the renovation costs. Is this correct? Partner Vivien Hogg explains.
You plan to leave the city for a rural life and will be farming on a just modest basis. The farmhouse will primarily be used as a family home but there will be some farm-related use. This raises question about how much, if any, of the costs are tax deductible.
Which taxes?
When you spend money on a property used for your business there’s more than one tax to consider. As you will run the farm as an unincorporated business, the taxes involved are income tax, capital gains tax and VAT (if you register).
VAT
Unlike direct tax, a deduction is allowed for VAT paid on costs where they simultaneously have business and private purposes. The difficult part is working out what proportion is reclaimable.
To avoid protracted arguments, HMRC has agreed with the National Farmers Union that 70% of VAT paid on expenses in respect of a farmhouse, e.g. repairs, can usually be reclaimed. However, this is not a blanket rule.
The 70% rule only applies where the farming activity is a full-time occupation and in respect of overheads, repairs and maintenance costs. Because your farming activity will only be part time, you must do your best to estimate how much of the time you will use the farmhouse for the business and limit the amount of VAT you reclaim accordingly.
Income tax
You are only entitled to claim a tax deduction where, at any time, any part of the farmhouse is used solely in the course of the farming business. This can apply where:
- An area of the farmhouse is used exclusively for the business all of the time.
or - An area of the farmhouse is used exclusively for the business some of the time. HMRC will accept any reasonable apportionment calculation.
For the renovation costs, you must decide which are capital expenditure. The expenses attributable to capital fall into two categories:
- Capital expenses that relate to equipment, e.g. for water supplies and heating.
and - Capital expenses relating to the farmhouse’s structure, e.g. the addition of an extension.
Capital gains
For the first type of expense, you can claim a tax deduction from your farming income as a capital allowance. However, expenses in the second category can only be taken into account for working out any capital gain or loss when the farmhouse is sold or transferred.
Simplified expenses
In respect of day-to-day farmhouse expenses, as an alternative to handling time and area apportionments and applying the result to property expenses, you could instead claim a tax deduction in line with HMRC’s “simplified expenses”.
IN SUMMARY
The 70% figure only applies to VAT and then only where farming is full time. You must therefore work out the amount of recoverable VAT and direct tax deductions based on the proportion of business use.
Contact the JRW Hogg & Thorburn team to discuss this further and any other related questions you may have.
