At some stage during the ownership of a caravan park, the park owner will want to dispose of the business or pass it onto the next generation.
For most businesses the Capital Taxes regime is quite benign. By selling a trading business and claiming Entrepreneur’s Relief, the capital gains tax liability is limited to 10% of the capital gain. If the trading business is gifted to their family this tax can be avoided using a “hold over” claim.
Alternatively, instead of making a lifetime gift to the next generation, on death the trading business can pass at its full market value with 100% relief from inheritance tax. This means that assets pass down the generations at uplifted values with no tax to pay.
Many park owners become particularly attached to their park and are keen to see it pass to the next generation. However, the application of these rules depend upon whether the park is deemed to be trading. This can be a problem for many parks. If the park fails this test, then on a gift or disposal, the tax rate increases to 28% for capital gains tax and to 40% for inheritance tax, a substantial increase.
So, why is a park not a trading business? The answer depends upon park activities. The park industry is incredibly varied. At one end of the spectrum is a holiday centre with multiple activities, clubs, restaurants, etc. At the other end are caravan sites with pitches limited to basic utility connections. The renting of land is not a trade so to claim any of the reliefs it is necessary to demonstrate that the business is not mainly renting land. Naturally, this is not straightforward.
A review of your accounts and income sources may quite quickly identify whether you are trading. If you are close to the borderline then it may be possible to report the accounts differently to highlight activities or perhaps change the park activity just a little.
Of course, commercial reality needs to be applied. It is fine to build a shop and club house to meet the trading test, but the park needs to be active enough to support this. Many parks realise this is highly inappropriate as it would make a loss. It may also destroy the ambience of the park that the owners have worked so hard to create.
Consequently, it is very important that the “tax tail does not wag the dog”. However, a park owner should recognise that they are running a business which may have significant tax implications for them or the next generation.
How can they respond? There are no easy answers and for some it may be inappropriate to do anything other than suffer the tax consequences. At least in this situation the business owner can be prepared and understand the consequences of their action. For others, who are perhaps close to the trading line, but struggling to reach it, by taking appropriate action and adjusting the nature of the park activity it may be possible to change dramatically the tax consequences of their action. In extreme cases, this can mean the difference between passing the asset onto the next generation for them to continue the business and a forced sale to meet the tax liabilities.
As ever, planning is vital and, in certain cases, with appropriate planning the solution can transform the outcome.
For more information, please contact Catherine Dymond at catherine.dymond@bushaccountants.co.uk.