The Budget seems a long time ago, and the much-heralded ‘tax day’, when the Government was set to announce a raft of consultations, passed without much comment. So is the coast clear for business owners and, in particular, caravan and holiday park owners in relation to Capital Gains Tax (CGT) and Inheritance Tax?
Before the Budget, there was talk about the loss of Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, which allows business owners to sell their interest in a trading business and pay just 10% CGT. The press had picked up on the Office of Tax Simplification (OTS) consultation, released in November 2020, in which the Chancellor was encouraged to replace BADR with a new relief focused more on retirement and to consider raising the rates of CGT so they were more closely aligned to Income Tax. These proposals led to a great deal of activity in the run-up to Budget Day as owners wanted to get sales completed before any changes came into force. However, in the end, the Budget did not change anything.
Furthermore, a previous report by the OTS had also called upon the Chancellor to consider the Inheritance Tax reliefs that businesses enjoy, in particular Business Property Relief, which exempts mainly trading businesses from IHT. The OTS, in this report, suggested that rather than applying the relief to businesses that are mainly trading (a 50% test), it should only apply to those businesses that were substantially trading, (an 80% test) aligning this to the CGT test for BADR. This would have had the greatest impact on those businesses that have a mixture of both passive income, such as rents, and trading income, like caravan parks.
The problem for these businesses is whether this is simply a delay in the inevitable changes to these taxes or, because of the impact this would have across many businesses, it is not something this Government would feel comfortable introducing.
My view is that the interaction between Inheritance Tax and Capital Gains Tax means that the 50% or 80% test will be looked at and aligned in the near future. The problem this creates for a caravan park is that the elements of trading would need to be carefully examined, probably annually, to make sure that the business would continue to qualify for this IHT relief, allowing those businesses to make decisions about succession with a clearer idea about whether the relief would apply.
In relation to BADR, I do see things differently and feel that whilst the relief may change over time it has remained focused on entrepreneurs since retirement relief was replaced.
In this new post-Brexit world I suspect the Government will want to continue to encourage people to take a risk with capital to build businesses. These entrepreneurs build a workforce eventually seeking to sell these, and start another, and so on. I think the relief will be here for some time to come although they may change the amount available for the relief; again I can see there being pressure to increase the limit from £1 million.
What to do if you run a caravan and holiday park?
It will be vital to understand if your business is structured correctly, ensuring it's as tax efficient as possible but also that the composition of your turnover falls on the correct side of the relief.
HMRC is looking for businesses, such as caravan parks, where the income could drift each year between qualifying and not and to challenge these whenever there is a sale (and BADR is claimed) or someone dies and the executors claim BPR.
In either case, it is important as part of your annual review to know whether you qualify for reliefs or not, and it is here where your accountant can help you understand the best way to show your turnover. This information can halve the amount of tax due on a transaction, and given where values are at the moment this means this can be a very significant figure.
I suspect we won’t see any further movement on either Capital Gains Tax or Inheritance Tax until the next Budget but in advance of that I would recommend that caravan and holiday park owners consider what the loss of these reliefs could mean for them and their families.