Nature of expenditure on renovation of farm buildings

The taxpayer a partnership had run a farm for many generations. As a result of one of the partner’s illness it was dissolved in October 2014. The farm manager had lived in the biggest farm property Balnakeil House but he moved out in the early 1990s and the house had since largely been unused and become uninhabitable.

The property was listed and in 2009 Historic Scotland offered to help fund the costs of its renovation along with that of another smaller house. Ultimately it was agreed that the properties would never be used for farm purposes so the taxpayer repurposed them as furnished holiday lets.

The taxpayer’s accounts included deductions for expenditure on its costs in the renovation.

HMRC said the expenditure was capital in nature because the character of the properties had changed – they were no longer to be used...