A small stone barn nestled in the Cumbrian hills revered as a pioneering piece of modernist art is under threat from property developers, after arts institutions including Arts Council England refused to save it.

Merz Barn is the unfinished work of artist Kurt Schwitters, who fled Nazi Germany after his work was deemed degenerate and made his home in Langdale in the Lake District.

Schwitters used the barn as a studio in the 1940s and turned it into an experimental dada-inspired artwork. He covered the walls in a collage of materials, from glass to found objects and sculptures, but died of pneumonia three months into the project, in January 1948.

The building is considered an important piece of national heritage, and artists and architects including Damien Hirst, Antony Gormley, Bridget Riley and the late Zaha Hadid have made financial donations towards its upkeep.

In 2011, Arts Council England withdrew funding for the maintenance and restoration of the barn, meaning that the Littoral Arts Trust – comprising Celia Larner, 80, and Ian Hunter, 70, who look after the property – have had to use their savings, pensions and even the sale of one of their houses to keep it going.

Last month, Arts Council England rejected an application for £75,000 of funding for Merz Barn for the fifth consecutive time. Hunter has also offered to hand the building to the Tate and the Museum of Modern Art in New York for free but both declined.

He said the Littoral Arts Trust had enough resources to look after the barn for only another three or four months.

“We’ve already had two developers approach us in the last six months about buying the land, offering us £300,000 cash,” Hunter said. “We’ve sold one of our houses to put into Merz Barn. We’ve used up our savings and our pensions are negligible, so our backs are against the wall here. We can probably hang on for another three or four months and then our hands will be forced.

“We’ve turned both of the developer offers down as they wouldn’t offer us any protections for the barn, and we would prefer not to sell it on the open market. But we don’t think we can hold off for much longer.”

Merz Barn artwork circa 1950. Photograph: Sprengel Museum Hanover

The historical and artistic importance of the modest building has been outlined by art critics such as Melvyn Bragg, who described it as “an outstanding contribution to the understanding of contemporary art” not only in the UK, but across the world.

While the barn’s elaborate swirling wall of art was moved to Hatton Gallery in Newcastle in the late 60s, the dark stone studio remains a powerful and emotive spot central to Schwitters’ legacy in the UK.

In 2011, when the Royal Academy of Arts held a major British sculpture exhibition, it erected a Cumbrian slate replica of the barn in the gallery’s courtyard. And while opening a conference about Schwitters’ legacy, at Tate Britain in 2014, then culture minister Ed Vaizey said: “Kurt Schwitters’ extraordinary Merz Barn and artistic legacy in rural Cumbria are our responsibility – in the north and also nationally.”

Local MP and current Liberal Democrat leader Tim Farron also gave his backing to the maintenance of barn in 2014. He said: “I cannot overstate how important a site the Merz Barn is and what a boost for the Cumbrian economy if some sort of art museum or similar could be accommodated there.”

Since Arts Council England withdrew funding, several artists have tried to plug the funding gap. Hirst has contributed £150,000; Hadid’s gallery gave £25,000 last year after the barn was damaged by floods during Storm Desmond.

Arts Council England, which stressed that it did not usually publicly discuss the reasons for grant allocations, said: “Grants for the arts is a highly competitive programme … as Littoral has mentioned it publicly, we can confirm that it was unsuccessful with this application due to competition for funds.”

In 2014, Arts Council England gave a £38,000 grant for Littoral Arts to compile a report into the future of Merz Barn and possibilities for its restoration. The report found that it was “potentially a major international success story for the UK, Cumbria and Arts Council England … there is likely to be increasing visitor demand for the preservation and interpretation of this artist’s work”.

It also warned that “stabilisation and restoration work at the site are urgently needed” to ensure its survival and to protect Schwitters’ legacy.

However, in a statement to the Guardian, Arts Council England criticised the report and said it did not “demonstrate a viable business case at that point nor did it cover other potential sources of capital funding beyond the arts council or offer any match-funding strategy”.

It added: “It is worth noting that the council’s role does not include protection and restoration of cultural heritage – this is the responsibility of other bodies.”

In a desperate measure, Larner sold her Lancashire mill cottage for £90,000 last year to help with the Merz Barn’s upkeep, which costs about £45,000 a year.

Hunter said having spent so many years looking after the site, he could not bear to see it go to ruin. He is considering selling his home as a last resort.

“Don’t get me wrong, we love it – but we’re two old people who realistically can’t be here labouring for much longer,” Hunter said. “So what we’ve tried to do is keep it going as best we can because we feel like we have a moral responsibility.”

The pair have also appealed to Nicholas Serota, the former Tate director who took over as head of Arts Council England this year, to rethink the organisation’s decision in light of his pledge to distribute funding across rural communities.

Hunter said he hoped another cultural institution would pledge to look after the barn on behalf of the nation.

Artist Anish Kapoor has expressed concern at the possibility that the barn could be sold to developers and its legacy destroyed. Jann Haworth, who co-created the Beatles’ Sgt Pepper’s Lonely Hearts Club Band album cover with Peter Blake, said: “[The potential loss of the barn] was a terrible reflection of indifference and carelessness for a national treasure … Schwitters’ project in the Lake District can be set as a triumph of what is best about Great Britain: its historic tolerance and welcome,or as a sign of its degradation into small mindedness and bitterness.”