'What a site'
'What a site'
My new clients, husband aged 53 and wife aged 44, own a caravan park (acquired 15 years ago) which does not have permission for all year round residential occupation. Sales are split evenly between (1) caravan sales (about two per annum); (2) holiday lettings in caravans; (3) seasonal lettings of pitches to caravan owners; and (4) letting of pitches to touring caravans. Additional charges are made for services such as gas, and there was a small shop, but this is now closed. The activities have been treated as a single trade although we are not aware if this was done on the basis of Extra-statutory Concession B29. The following questions arise.
Given that all the profits are liable to Class 4 National Insurance contributions, would it make sense to segregate activities 2,3 and 4 (above) for Schedule A assessment? (Annual pension contributions are less than £3,600 each.)
How much of the land would qualify for business asset taper relief, and would the proposed change in income tax treatment affect this?
We have also been asked to advise on possible incorporation of the business. From a taper relief viewpoint, would it be sensible to incorporate the first two activities only and not introduce the land into the company? Alternatively it might be that the business will remain in the family and be handed down to the next generation. If holdover relief is available for all the assets, would it be simpler to transfer all the activities and the land to a limited company? In that event, we would need to consider whether section 162 deferral relief for disposal of the business in exchange for shares would be more appropriate.
(Query T16,172) - Backwoodsman.
The nature of the business for capital gains tax taper relief purposes is likely to follow, closely, its status for inheritance tax business property relief purposes. Tax Bulletins No 53 (June 2001) and 62 (December 2002) outlined an 80 per cent composite test approach for the purposes of paragraph 22A of Schedule A1 to the Taxation of Chargeable Gains Act 1992, based on a cocktail of tests, i.e. turnover, asset base, expense base and profitability, along the lines of the approach adopted in Farmer and Giles (Farmer's Executors) v Commissioners of Inland Revenue [1999] STC (SCD) 321. The exact mix is, however, liable to be selected on an ad hoc basis and, on the information given, it would have been difficult to form a view, even on the basis of the law as it was understood before 27 February 2003.
The only context in which this sort of thing has been litigated hitherto is business property relief, which may not be as much in the contemplation of the clients at present, because they are husband and wife and because of their ages. The efficacy of the Farmer approach may, however, now be open to question in the light of the Revenue's successful appeal in Stedman's Executors v Commissioners of Inland Revenue [2002] STC (SCD) 358 on 27 February.
This leaves Furness v Commissioners of Inland Revenue [1999] STC (SCD) 232 as the only case in which the taxpayer has been successful and the reasoning in that case might well no longer be reliable in the light of the short reports currently available in Stedman's Executors. The Revenue had won at first instance in three other cases: Hall and Hall (Hall's Executors) v Commissioners of Inland Revenue [1997] STC (SCD) 126, Powell and Halfhide as personal representatives of Pearce v Commissioners of Inland Revenue [1997] STC (SCD) 181, and Weston (Executor of Weston) v Commissioners of Inland Revenue [2000] STC 1064.
The approach that Mr Justice Laddie appears to have adopted in Stedman's Executors suggests that incorporating the whole business would be a non-starter in this case. One must ascertain what a 'businessman' would regard as the core activity, i.e. letting the caravan parking plots, and treating the trading activities as purely incidental to that.
If the 'clear' trading activities were to be split off into a company, both business asset taper and 100 per cent business property relief would be available, in due course, for the shares. Although the rent from the company and the Schedule A receipts from the pitches would be free of the National Insurance contributions surcharge, the extent to which the land would qualify for:
* business asset taper, by reason of being let to an unlisted trading company under paragraphs 5(2)(b) and 6(1)(b)(i) of Schedule A1 to the Taxation of Chargeable Gains Act 1992; and
* business property relief (albeit at 50 per cent under section 105(1)(d), Inheritance Tax Act 1984 in the hands of the controlling shareholder)
would depend upon the way in which the trading activities could be segregated, physically, from the Schedule A residue.
The change in income tax Schedule would clearly be a relevant factor, being a necessary consequence of the division of the business and the intended National Insurance saving.
As to whether, in the event of the whole business being incorporated, it would be desirable to make:
(a) a holdover election under section 165, Taxation of Chargeable Gains Act 1992, this would be best done before 5 April in view of the change in the nature of the qualification test for a 'trade' from 51 per cent to 80 per cent. However, an examination of the full text of the decision in Stedman's Executors may well make this a non-starter;
(b) provided that any cash needed for tax and other outgoings is first withdrawn from the business, section 162 of the same Act would give a more definite outcome and the age of the parties would not suggest that any consideration need be given to electing under section 162A. Such an election might, however, be necessitated by any doubts which an examination of the full text of the judgment in Stedman's Executors might engender. - JdeS.
As regards annual pension contributions, the £3,600 threshold remains available irrespective of the level of earnings.
We are told that the business may remain in the family, but the 100 per cent business property relief in sections 104 and 105, Inheritance Tax Act 1984 is unavailable where the business consists wholly or mainly of making or holding investments.
The governing considerations in the case of a caravan park were fully gone into in Weston v Commissioners of Inland Revenue [2000] STC 1064, where a company conducted the activities described by 'Backwoodsman'. The Weston case emphasised the supremacy of matters of fact (rather than law) and the Special Commissioner who heard it (initially) compared and contrasted his findings in three earlier caravan park cases. The Revenue won because caravan sales were merely ancillary to pitch fees.
There is a danger that the proposed segregation of income from land would deprive the property of even the chances of the 100 per cent relief, and possibly also the 50 per cent relief for land held outside a company but used by it. It would be essential to spell out every aspect of 'Backwoodsman's' clients' business, which seems to be a holiday park - a positive factor. Moreover, the non-investment nature of a shop could provide helpful evidence sufficient to warrant restarting or widening such facilities.
The article 'Incorporating New Ideas' by Ken Moody in Taxation, 20 February 2003 at pages 485 to 488 outlines incorporation benefits. - M.C.N.
Editorial note: The Inland Revenue's Capital Taxes' Advanced Instruction Manual (on the Revenue website - www.inlandrevenue.gov.uk) has not yet been updated in respect of the various 'caravan site cases'.
Paragraph L99.4 states that:
'No caravan site cases have yet been heard by the Special Commissioners but in considering section 105(3), Inheritance Tax Act 1984, the principles adopted in Martin and Horsfall (Moore's Executors) [1995] STC (SCD) 5 and Burkinyoung (Burkinyoung's Executor v Commissioners of Inland Revenue [1995] STC (SCD) 29 may be applicable'.
However, paragraph L99 should be useful reading for those interested in the Revenue's views on this subject.
