Convert farm buildings to holiday accommodation

Planning permission for conversions

Class Q prior approval

Class Q permitted development is attractive because it is faster and cheaper than full planning permission. The rules were expanded on 21 May 2024. However, there are strict conditions:

• The building must have been part of an established agricultural unit on 24 July 2023 - you will need evidence (photographs, farm records, invoices)
• The conversion must be achieved through works that are 'reasonably necessary' - you cannot demolish and rebuild
• Transport and highways impacts are assessed - poor access may result in refusal
• You still need building regulations approval in addition to planning
• Maximum conversion is 10 dwellings and 1,000 square metres of cumulative floorspace, with each dwelling no larger than 150 square metres

Prior approval is not automatic. Local authorities refuse applications that fail the tests, particularly on highways grounds. Consider pre-application advice before investing in detailed plans.

Building regulations

Holiday let conversions require building regulations approval covering:

• Fire safety: Escape routes, fire detection, fire-resistant doors. Holiday lets with sleeping accommodation have specific requirements.
• Structural stability: Especially important for older agricultural buildings. A structural engineer's report may be required.
• Thermal performance: Insulation requirements under Part L. Converted buildings must meet minimum energy efficiency standards.
• Drainage and sanitation: Proper foul and surface water disposal. May need septic tank or connection to mains.
• Electrical safety: Compliance with Part P. All electrical work must be certified.
• Ventilation: Adequate ventilation to habitable rooms and bathrooms.

You can use local authority building control or an approved inspector. Certificates of completion are required before occupation.

Fire safety requirements

Holiday accommodation has specific fire safety obligations under the Regulatory Reform (Fire Safety) Order 2005:

• Fire risk assessment: You must complete and regularly review a fire risk assessment for each property
• Smoke alarms: Working smoke alarms on each floor level
• Carbon monoxide alarms: Required in rooms with solid fuel appliances (recommended for all fuel-burning appliances)
• Fire blanket: In or near the kitchen
• Fire extinguisher: Appropriate to the property's risks
• Escape routes: Clear, unobstructed routes to exits
• Fire doors: May be required depending on building layout
• Emergency lighting: May be required for larger properties or complex layouts

Keep records of fire safety equipment testing and maintenance. Display emergency information clearly for guests.

Tax treatment after April 2025

From 6 April 2025, holiday lets are taxed as standard residential property income. The special FHL regime no longer exists.

How rental income is now taxed

Your holiday let income is added to your other income and taxed at your marginal rate:

• Basic rate: 20% (income up to £37,700 above personal allowance)
• Higher rate: 40% (income £37,701 to £125,140)
• Additional rate: 45% (income over £125,140)

Mortgage interest restriction

If you have a mortgage on your holiday let:

• Before April 2025 (FHL): Full mortgage interest deducted from rental income before tax
• From April 2025: You receive a 20% tax credit on mortgage interest, regardless of your tax band

Example impact: A higher rate (40%) taxpayer with £10,000 annual mortgage interest previously saved £4,000 in tax. From April 2025, they receive only a £2,000 tax credit - an additional £2,000 tax cost per year.

Furniture and equipment

• Before April 2025: Capital allowances available - full Annual Investment Allowance (up to £1 million) on furniture, fixtures and equipment in year of purchase
• From April 2025: Only Replacement of Domestic Items Relief available - deduct the cost of replacing (not initial purchase) domestic items on a like-for-like basis

This significantly affects the economics of new conversions, as initial furnishing costs have no immediate tax relief.

Capital Gains Tax on disposal

If you sell your holiday let property:

CGT rates from April 2025

• Basic rate taxpayers: 18% on gains
• Higher/additional rate taxpayers: 24% on gains

These are the standard residential property CGT rates. Business Asset Disposal Relief (the 10% rate formerly available for FHL) is no longer available for holiday let disposals from 6 April 2025.

Transitional rules for BADR

If your holiday let business ceased before 6 April 2025, you may still be able to claim Business Asset Disposal Relief on a disposal, provided:

• The business genuinely ceased (no bookings, no intention to resume)
• The property met FHL qualifying conditions for at least 2 years before cessation
• You dispose of the property within 3 years of cessation

BADR rates for qualifying disposals:

• 2025/26: 14%
• 2026/27: 18% - the rate increased from 6 April 2026

The £1 million lifetime limit on BADR qualifying gains still applies.

Other CGT reliefs lost

• Rollover relief: Cannot defer CGT by reinvesting in other business assets
• Gift relief: Gifting the property to family triggers immediate CGT at market value (no holdover)

Transitional rules for existing owners

Capital allowances pools

If you had capital allowance expenditure in a pool before 6 April 2025:

• Writing Down Allowances continue at 18% (main pool) or 6% (special rate pool)
• No balancing allowance or charge triggered by abolition alone
• You cannot add new expenditure to the pool from April 2025
• Balancing allowances/charges apply when you actually dispose of the assets

Carried forward losses

FHL losses carried forward from before April 2025 can now be offset against other UK property income (not just FHL income). This is actually a beneficial change if you have other rental properties.

Jointly owned properties

From 6 April 2025, the default 50:50 income split between spouses/civil partners applies to former FHL properties (FHL was previously exempt from this rule).

If you own the property in unequal shares and want to be taxed accordingly:

• Complete HMRC Form 17 declaring your actual beneficial interests
• Submit within 60 days of the declaration date
• For the transition, declare on 6 April 2025 and submit by 5 June 2025

Does holiday letting still make sense?

Holiday letting remains commercially viable for many properties, but the financial case has changed. You need to reassess:

When it may still work well

• Unmortgaged properties: The mortgage interest restriction does not affect you
• Basic rate taxpayers: The mortgage interest change has less impact (20% credit equals 20% marginal rate)
• High-demand locations: Strong occupancy and premium pricing offset increased tax
• Existing furnished properties: Initial furnishing already done before April 2025
• Diversification from low-margin farming: Holiday income may still exceed agricultural returns

When to reconsider

• Heavily mortgaged properties: Higher rate taxpayers see significant additional cost
• New conversions requiring substantial borrowing: Both interest restriction and no capital allowances on initial fit-out
• Planning to sell within a few years: No BADR means higher CGT on exit
• Using FHL profits for pension contributions: Need alternative relevant earnings

Alternative options

• Long-term letting: Assured shorthold tenancy - simpler, more stable income, same tax treatment as holiday lets now
• Incorporation: Transfer to limited company to keep full interest deduction (but consider SDLT, CGT on transfer, double taxation on extraction)
• Mixed use: Combine with other diversification activities to spread risk

Farm-specific considerations

Apportionment between farming and letting

Diversified farming businesses must carefully distinguish between:

• Trading income: Farming activities (taxed under trading rules)
• Property income: Holiday letting (taxed under property income rules)

Keep separate records for each activity. Shared costs (such as access roads, utilities) must be apportioned on a reasonable basis.

Agricultural Property Relief for Inheritance Tax

Buildings converted to holiday lets generally do not qualify for Agricultural Property Relief (APR) because they are no longer used for agricultural purposes.

However:

• The underlying land value may still qualify for APR if it is agricultural land
• Business Property Relief (BPR) may be available if the letting qualifies as a trade (multiple properties, intensive management, significant services) - seek specialist advice
• From 6 April 2026 (Finance Act 2026), APR and BPR share a combined £2.5 million 100% relief allowance per person, fully transferable between spouses and civil partners (up to £5 million for a couple), with 50% relief above

Diversification grants

Converting farm buildings to holiday accommodation may be eligible for rural diversification funding. Check current availability of:

• Farming Equipment and Technology Fund (for equipment, not buildings)
• Countryside Stewardship (may support access and environmental improvements)
• Local authority rural enterprise grants (varies by area)
• LEADER/rural development programme successor schemes

Grant availability changes frequently. Check the RPA funding guidance for current schemes.

Business rates vs council tax

Holiday accommodation can be assessed for business rates instead of council tax if it meets commercial letting thresholds:

England

• Available for short-term letting at least 140 days per year
• Actually let commercially for at least 70 days per year

Wales

• Available for at least 252 days per year
• Actually let for at least 182 days per year

Properties on business rates may qualify for Small Business Rate Relief (100% relief if rateable value under £12,000 in England, tapered to £15,000).

Note: These thresholds are separate from the abolished FHL tax thresholds. Business rates eligibility is unchanged by the FHL abolition.

Licensing requirements

Holiday lets do not generally require a licence in England, but check local requirements:

• Scotland: Mandatory short-term let licensing scheme applies. You must obtain a licence from your local authority.
• Wales: Registration scheme being introduced. A Visitor Accommodation Levy may apply from 2027.
• Northern Ireland: Separate regulatory framework. Contact your local council.

Some local authorities in England have introduced additional planning controls on short-term lets in areas of high housing pressure (Article 4 directions). Check with your local planning authority.

Insurance

Standard farm insurance typically does not cover holiday letting. You need:

• Public liability insurance: Minimum £5 million, £10 million recommended for tourism activities
• Property insurance: Specialist holiday let cover (standard residential policies may not cover commercial letting)
• Contents insurance: Cover for guest damage and theft
• Business interruption: Cover for lost income if property is uninhabitable
• Employers' liability: If you employ cleaners, maintenance staff, etc. (legal requirement - minimum £5 million)

Always disclose all activities to your agricultural insurer. Failure to disclose diversification may invalidate your entire farm policy.