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2 April 2019
The caravan park industry is a rather varied one.
At one end of the spectrum is the all-singing, all-dancing holiday and leisure parks. In many ways, it might be more like Center Parcs than the traditional caravan site. It may have multiple swimming pools, a leisure centre, playgrounds, soft play, an equestrian centre, pubs, clubs, restaurants and a fleet of hire caravans as well as owner-occupied static caravans. It may do a roaring trade selling its own caravans and executive holiday lodges.
At the other end of the spectrum, a park may be little more than a maintained field with a handful of hard standing pitches and limited connections to utilities.
The variety of tax issues is, as one might expect, equally as wide ranging. This is a series of three articles that examines some of the issues.
This first article is concerned with capital taxes – in other words capital gains tax and inheritance tax.
Historically, many caravan park businesses have relied on the FHL rules to treat them as trading. The advantage of this being:
Although large parks may have sufficient activities to be trading as a matter of fact (see below), many smaller parks will look to be within the FHL rules in order to benefit as described.
Of course, these days, it may not just be caravan lettings. It may include traditional cottages, chalets and lodges and more exotic accommodations such as pods and yurts!
The FHL rules changed (read tightened) from April 2012. Properties must now be
to qualify as an FHL business. This can be quite tough for some parks considering how long (short?) the UK holiday season actually is!
A park may have a number of properties each meeting the availability test above. If none of these are made available on a longer term letting (no more than 31 days) for more than 155 days a year then the mean of the lettings ‘actual letting’ periods may be taken. This is called “averaging”.
Averaging must be claimed within 12 months of the 31 January after the end of the relevant tax year, ie by 31 January 2021 for the 2018/19.
A park could also take advantage of the ‘period of grace’ rules. These allow an FHL business, which does not meet the tests outlined above for one or two years, to continue to qualify. However, the holiday park owner must retain a genuine intention to meet the letting conditions.
This is usually a key issue for caravan park owners.
The nuances and wrinkles in this area can be seen from a quick glance at the disproportionately high percentage of Business Property Relief (BPR) cases involving this type of activity!
Of course, this body of case law is helpful in aiding our understanding of the relevant issues.
It is a very attractive relief that may potentially apply to hundreds of thousands of trading businesses up and down the country.
It essentially can provide 100% relief from Inheritance Tax (IHT) on both lifetime gifts and on the death estate.
In this context ‘wholly or mainly’ means 50%, so the business must be at least 50% trading. In determining whether this is achieved then the following factors need to be considered:
These factors need to be considered ‘in the round’ to check whether they are outweighed by other factors.
The key case is that of Farmer.In addition, further guidance on the application of the ‘FarmerTests’ can be drawn from what is referred to as the Stedman case’. Although this was a residential caravan park not a holiday park, the taxpayer won on the strength of the underlying services charged to the customers as part of the pitch fee.
Another recent headline case was Pawson.Much was made of the case at the time (as in the first instance the First Tier Tax Tribunal has badly decided in the Taxpayers favour on the availability of BPR in respect of a single holiday letting). This was briefly helpful until it was unsurprisingly over-turned by the Upper Tier Tribunal. As a result, it has made little difference to the body of case and the factors discussed above.
In reviewing the position of a park business, different activities may contribute to the trading or investment side of the business.
The following activities are usually ‘trading’ activities:
The rental element of the pitch fee and any touring caravan storage will generally be investment income.
So for holiday parks with a lot of activities, such as pubs, clubs, swimming pools and shops, the argument that the business is trading is going to be much easier.
But many ‘quieter’ parks may also be trading businesses. Care needs to be taken in the presentation of this information in the annual accounts. It’s always going to be much harder to argue that income shown as rent in the accounts is actually the provision of services.
It is clear that HMRC will, and do, challenge claims for relief.
This is especially the case where the trading activities of the business appear to around the 50% threshold.
We would therefore recommend that a Client reviews their position and, at the very least, knows where they stand. In other words, they definitely qualify, they definitely don’t qualify or whether they are somewhere in the middle.
Of course, it is not the end to the world. There will be a number of other planning opportunities available to a business owner if one is looking to minimize the tax on death or are looking at a more commercial succession planning exercise.
Each person has a lifetime ER allowance covering gains of up to £10 million on qualifying trading businesses. Gains up to this limit are taxed at a lower rate of 10%.
The excess (or the gain in cases where no relief is available) will usually be subject to 20% tax.
You can quickly see that this relief is worth up to £1 million for an individual park owner. Potentially therefore a park owner will be seeking to maximize any relief.
Again, it is necessary to show that the business is a trading business. Generally, the same considerations apply as to those mentioned above in relation to BPR.
Where the business is run through a company, there is a requirement that the business does not include a substantial investment element. For these purposes, “substantial” is defined as 20%.
It is necessary to meet the various conditions for ER for twelve months prior to the relevant disposal for disposals before 6 April 2019.
From 6 April 2019 onwards, one must qualify for 24 months.
One should therefore review the availability of the relief well in advance of a potential sale to ensure relief is maximized.
In separate articles, we will discuss some of the other caravan park tax issues that may arise where one runs such a business.
In the meantime, if you have any caravan park tax issues, then please get in touch.
Caravan park tax – CGT and IHT issues was last updated on 2 April 2019