Passing a family-run business to the next generation should be straightforward. There are reliefs from inheritance tax (IHT), in particular business property relief, which can reduce the value of the asset to nil for IHT purposes. The relief is designed to allow a smooth succession without disruption to trading for family businesses.
But for holiday park owners, there is a problem. Business property relief (BPR) is not applicable where a business is designated as being principally involved in property investment. To be eligible for BPR, a business must be a ‘qualifying trading business’, and not one which makes its income primarily through the ownership of land and property.
Even if you regard what you do as trading, HMRC may take a different view. This is important, because if IHT becomes payable on the transfer of the business, you could end up paying up to 40% of what it is worth in tax – and few businesses can afford that.
The issue is about to what extent you derive income from activities other than the rent you charge. This can includes things such as bars and restaurants, leisure and entertainment, cleaning and laundry. As a rule of thumb, 51% of the business’s turnover needs to come from such activity to be regarded as a trading business, but it is often more complex that this measurable alone.
Part of the problem is that the rules are far from clear-cut; every holiday park will be different. Sadly, cases of this nature often end up in court, with the attendant stress and hassle, expense and uncertainty. The problem is that if you wait until the business passes down to the next generation to find out, it will probably be too late.
Fortunately, there are ways of mitigating a potential IHT bill, provided you plan well in advance. The most obvious is to gift a share of the business to the next generation while you are still living.
Such transfers are limited in value to the equivalent of the nil rate IHT band - £325,000 for individuals, or £650,000 if the business is owned by a husband and wife.
Provided you survive for seven years after the gift is made, that portion of the business will not be liable to IHT. And after seven years, you can repeat the process, gradually transferring the business to the next generation.
Bear in mind that a gift is regarded as a disposal for capital gains tax (CGT) purposes, so advice is essential to avoid triggering a CGT bill – especially as the CGT annual exemption is being whittled away (and a change of government could mean higher CGT rates).
Another solution is to set up a trust, and gradually transfer the value of the business into the trust. Again, the value that can be settled on trust is restricted, so starting early is vital to be able to transfer the whole business across during your lifetime. This route has advantages in terms of CGT, and is often preferred where the next generation are still children.
A third, and less common, option is to consider demerging your business so that the land-owning part of it is separate from the trading business. The latter can then be eligible for BPR, with the potential IHT liability reduced to cover only the former.
This can be a very complex subject, and one where the rules are anything but clear-cut, so this is an area where expert advice is important. If you can’t demonstrate that your business is primarily a trading one, and not mainly a property investment business, then early planning for how it will be passed down to the next generation is vital.