The fairytale castle in search of a happy ending

The intention had been to turn Taymouth into Scotland's first seven-star hotel - a rating so exclusive it does not officially exist, and is considered to apply to only one other hotel in the world, the glorious Burj al-Arab in Dubai. The project began in 2002, when a team of developers revealed elaborate plans to rescue Taymouth from ruin.

Their vision for the castle, a classic example of the early 19th-century neo-Gothic era, would feature marble bathrooms, Italian silks, Chinese carpets, suits of armour, hanging claymores and a first-class restaurant serving everything from Highland venison to Caspian Sea caviar. Presidential suites with beds fit for maharajahs would overlook the magnificent four-storey atrium; principal apartments such the ballroom, library, China room and banner room would be restored to their original glory. There would be a health spa, tennis courts, clay-pigeon shooting, an equestrian centre and a world-class golf course. Together with about 60 outlying lodges and at least 20 timeshare villas, it would surpass anything that Donald Trump has in mind for Aberdeenshire and become a hero building for the local community, boosting tourism and investment throughout the area. The project designer, Peter Inston, who has built a palace for the Emir of Qatar and an Irish castle for the Riverdancer Michael Flatley, boasted that Taymouth would "make Gleneagles look like a Salvation Army hostel".

But as we approach the end of what should have been Taymouth's first season, none of those plans has come to fruition. The rooms gather dust; the corridors stand in darkness. The project has ground to a halt amid stories of personality clashes between the developers, planning and construction crises, and financing difficulties. Rumours are rife among locals that the sleeping beauty of Taymouth may never be awakened. And the great revival that was supposed to mark the end of a lengthy decline has instead become the latest instalment in a centuries-long drama.

Historically, Taymouth was the jewel in the crown of the Campbells of Glenorchy and Breadalbane, one of the most powerful families in Scottish history. Originally built as Balloch Castle in 1552 for Sir Colin Campbell, the Laird of Glenorchy, Taymouth was the seat of an estate that spanned over 400,000 acres at its height and stretched across the central Highlands to Oban on the west coast. In the 1800s the castle was demolished by its then owner, John Campbell, the first Marquis of Breadalbane, and then rebuilt under the name of Taymouth.

Its new guise as part castle and part country mansion was so impressive it inspired Queen Victoria, a keen visitor to the Highlands, to buy Balmoral. Victoria's love affair with Taymouth reached its apotheosis in 1842, when she and Albert spent their honeymoon there. She wrote in her diary of the lavish welcome the couple received. "The firing of the guns, the cheering of the great crowd, the picturesqueness of the dresses, the beauty of the surrounding country with its rich background of wooded hills, altogether formed one of the finest scenes imaginable. It seemed as if a great chieftain in old and feudal times was receiving his sovereign.

Alas, by the end of the first world war, with the splendour of the Victorian age a fading memory, Taymouth's luck changed for the worse. It was still in the hands of the Campbells of Breadalbane, by then a rapidly fading dynasty. The family's wealth had foundered under bad management and the gambling addiction of the last marchioness. They were forced to sell Taymouth to a consortium that included the MacTaggart family, who had made their fortune in the Glasgow building trade, and who later became the full owners. The new group converted Taymouth into a hotel, installing elevators in the Art Deco style that was then all the rage, and turning the deer park into a golf course to create a luxury retreat for the 1920s elite. Ominously, however, the Taymouth Castle hotel never turned a profit.

With the onset of the second world war in 1939, Taymouth was requisitioned by the government and turned into a hospital for the wounded. There followed stints as a resettlement centre for Polish refugees, a civil defence centre and a school for the children of American oil barons. But by the late 1970s Taymouth had fallen into disuse, except for occasional dinners or parties. It seemed as well known for its ghosts, which are said to include a little Indian boy prince and a Green Lady, as anything. The years have seen numerous reports of noises in the night, children too scared to sleep and visitors tearing out of rooms in fright.

The MacTaggarts spent most of the 1990s trying to sell the estate. Madonna was among those who were interested - until she discovered she would not be allowed to close the golf course to the public. The castle had a starring role in the Queen Victoria epic Mrs Brown, playing the part of Balmoral, but even this could not entice potential buyers to take on the huge, decaying building.

By the turn of this century, it was suffering badly from leaks and rot. Even Historic Scotland, the government agency charged with safeguarding the nation's historic buildings, was so afraid of the costs that it refused to step in and take on the necessary restoration work itself. With time running out, the MacTaggarts knew that if they did not find a solution soon, the castle would be beyond repair.

That was when the present instalment of the saga began, with news emerging six years ago of a group of charming princes who would rescue Taymouth. That group was John French, Clynt Wellington and Barry Fowler of Hotels International (HI), a Hampshire-based company with a proven track record in luxury developments. After the group developed Taymouth, by turning it into one of the most luxurious hotels in the world, the plan was to hand it on to Four Seasons, the Toronto-based luxury hotel operator, who would then run the establishment.

The big question on my mind, as I survey the fences and the Keep Out signs outside the ghostly hotel with no guests, is what went wrong? Is there any hope that this magnificent palace will ever be restored to its former glory? And will the fairy tale have a happy ending? In search of answers, I get back in the car and begin making enquiries among the local community.

I discover that many locals in Aberfeldy and Kenmore were overjoyed when news of the luxury hotel plan came to light. There were promises of 250 jobs over the next five years, not to mention the economic opportunities those well-heeled tourists would bring to the area.

"By and large," says Ken Lyall, deputy convenor of the Perth and Kinross planning committee, "the public were very keen to see something happen to the castle. Everyone recognised that it would bring lots of employment to the area. The general view was that it was going to be great." I also speak to a neighbour of the castle, Robin Menzies, owner of the Mains of Taymouth holiday cottages and caravan site. "All my life I have listened to rumours about Taymouth," he says. "When we heard that this was happening, especially in the upmarket way that the developers were planning, I thought it would be fantastic."

Further investigation reveals that not everyone shares this enthusiasm. Or at least they didn't to begin with. There were, for example, gripes about whether public access to the Taymouth golf course would be maintained. However, it was not locals, but national heritage organisations that initially caused the most problems. The developers had to assuage Scottish Natural Heritage's concerns about the impact on local wildlife. Protracted, and at times heated, negotiations with Historic Scotland were also required before the government body was satisfied that the castle would be made wind and water-tight before the developers turned their attention to the outbuildings. It was not until the spring of 2005 that HI reached agreement with Historic Scotland and bought the castle from the MacTaggarts for £12m.

With the deal done, a team of labourers arrived to begin work. I am told that many of the workers were Romanian. As many as 60 were camped out in a village of caravans in the trees behind the castle. They set about hollowing out the rooms and repairing the roofs, ceilings and windows. Countless chandeliers, pieces of plasterwork, embroidered drapes and at least one antique table were packed into lorries and taken away. Work progressed well.

The wheels started to come off later in 2005. Four Seasons dropped out for reasons that have never emerged. Work kept stopping and starting as investors came and went. The project's bankers, HSBC, appointed a property specialist to ensure that the roof was made wind and watertight to protect their investment. The agency that supplied the labour meanwhile ran into its own financial problems, withdrawing labourers to work on other projects.

This upheaval was capped by two events at the end of summer 2006. The developers invited two Dublin-based investors, thought to have invested £5m between them, to help shore up the project. This should have got things back on track, but instead, as workers raced to paint the piping and fix the windows on the roof, work ground to a complete halt.

Nobody has lifted so much as a nail since. The directors of HI, meanwhile, have struggled to find new investors. Rumours emerged of entourages of wealthy Arabs and Indians arriving in black cars, with bankers and hoteliers trailing behind, but nothing seemed to come of it. By the time the directors decided last year that they would sell and had apparently found a buyer, the credit crunch scuppered the deal at the last minute. According to one person I spoke to, this was the point when they came closest to despair. Early this year, it transpires, the golf course - one of the few parts of the site that had remained functioning - faced closure, had it not been for the neighbouring Kenmore Hotel agreeing to lease it for a season and pay the staff's salaries.

Wilma Harrison, a local woman who worked in the castle in her youth, says the developers want locals to remain optimistic.

"But that wears thin after two years," she adds. "I don't suppose how people feel is really that important when you are a developer, but it might have been in their interests to be more forthcoming with the community. But everybody here is grateful that the job has been taken on, even if it hasn't come to fruition."

Frances Chassar, manager of the Kenmore post office, who ran the Taymouth estate for the directors, says: "I don't think people give them credit for the work that went on behind the scenes before they bought the estate. They jumped through hoops with Historic Scotland to get planning permission to spend an enormous amount of money."

Anne Brennan, the minister at the local manse, wonders if the project will ever happen. "There have been so many changes on the estate that the locals take a philosophical view, that if it happens it happens."

Perhaps now the uncertainty is about to end. The Guernsey-based property developer London Allied, which has refurbished a number of period houses in England and Wales, is in advanced talks to buy the castle. Co-founder Terry Collins told the Sunday Herald a few weeks ago: "All we can say is that we've looked at the Taymouth project. There are a lot of projects on the website that we look at, and only some of them come off. At this stage it would be premature to say anything more, although it would be a wonderful project."

When I speak to HI developer John French, a happy conclusion does seem to be possible. "We have spent millions of pounds saving one of Scotland's finest, most beautiful properties and we are proud of that," he says. "The east wing and the west wing were totally derelict and the seven principal rooms have been saved, all under the full watchful eye of Historic Scotland. All I can say is that we are very close to closing a deal which will assure the future of the property."

Local MSP John Swinney, the Scottish government's finance minister, is very keen for the development to succeed. "I have welcomed this project as a new contribution to economic and tourism development in Highland Perthshire," he tells me. "This is a hugely exciting opportunity, in a beautiful part of the country, and I am prepared to do all that I can to try and assist the development."

As Kenmore contemplates another winter, everyone waits anxiously to see whether the ship has come in. Melancholy light continues to seep through the stained-glass windows of the castle's empty ballroom, unseen by the public for almost a decade, while, from what I can gather, the shabby 1920s reception waits to be dismantled nearby. The basement and upper rooms are stripped back to the stonework, with safety warnings in English and Romanian painted all over the walls. The chamber where Queen Victoria and Prince Albert spent their honeymoon gathers dust behind a fake bookshelf door in the library, and the Breadalbanes' fading "Follow Me" motto is woven into decorations and embroideries on the walls.

As I head back along the gravel road that twists towards the arched entrance, the conclusion to this story seems to be lost amid the dark Perthshire trees. The castle gates close for another night, awaiting this fairy tale's happy ending.