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HMRC internal manual

Inheritance Tax Manual

Business relief: Investment businesses:Caravan sites

Caravan sites may present more problems in view of the variety of facilities provided. They may range from land on which to park caravans with minimal utilities laid on, up to a full-scale holiday camp where the recreational and social facilities are of primary importance and the accommodation is only secondary.

A number of caravan site cases have now been heard by the Courts and Tribunals, the most recent of which, Executors of Stedman v IRC, was eventually decided in the Court of Appeal as IRC v George (2003) EWCA 1763. This case was preceded into the Chancery Division by Weston (Executor of Weston deceased) v CIR (2000) STC 1064.

Furness v IRC (1999) SpC 202

Although the caravan site in this case was licensed primarily for static vans, caravan rallies also took place in summer and a high level of service was provided for those using the site. More importantly, the static caravans were owned by the residents who had to buy them from the partnership, could not sublet them and had to sell them back to the partnership.

The net profit from the sales exceeded the net profit from the renting of pitches and evidence was given that the proprietor had spent 80% of his time on activities not connected with caravan sales. The business was not comparable to that of a landlord owning a block of flats. Business relief was available.

Weston (Executor of Weston deceased) v CIR (2000) STC 1064,

In this case the photographic evidence submitted to Lawrence Collins J reminded him of a suburban housing estate in miniature. The mobile homes did not have the appearance of caravans. They looked much more like small bungalows. It was found from standing back and looking at the matter in the round that the pitch fees were not ancillary to the caravan sales but that if anything the opposite applied. The business was one which consisted mainly of holding investments and business relief was not available.

IRC v George (2003) EWCA 1763

Although the Weston approach was approved by the High Court in George, that decision was overturned in the Court of Appeal, which found in the taxpayers’ favour.

The Court of Appeal rejected the legalistic approach adopted in the High Court on the strength of Weston in favour of the more general overview adopted in Farmer v IRC (1999) STC (SCD) 321. This involved looking at the business in the round and deciding whether the holding of property as investment was the main component of the business. If it was not, then the business was entitled to business relief.

The business in George was a true hybrid, with income from caravan sales, commission on caravan sales, site fees, supply of electricity, gas, water and sewerage to residents, a club also open to non-residents, caravan storage, let property and fields, insurance, and interest on cash balances.

The judgement in George is helpful in clarifying what is to be regarded as either investment or non-investment activity. It makes clear that the provision of services to owner occupiers under the terms of a pitch agreement is largely a non-investment activity. This means that in cases where a large part of the business’s activities (measured in both time and money) consists of providing services to residents, we would be more likely to consider that the business was neither wholly or mainly investment in nature. However, we need to be satisfied that the figures for pitch fees, for instance, are not artificially depressed in the accounts in favour of inflated figures for wages or other non-investment expenses.

Note also that payments paid by non-owner occupiers may well be primarily rental payments to occupy the caravan/mobile home/chalet, rather than for the provision of services.

The judgement in George also recognises that the time and money spent on maintaining amenity areas is in part designed to maintain the value of the owner’s investment. It follows that the taxpayers are entitled to return a reduced level of investment income by offsetting against it part of the maintenance costs. As this could lead to the net investment income being, proportionally, a smaller part of the overall income of the business we might well conclude in a particular case that the business was neither wholly or mainly one of holding investments.

On the other hand, we would also need to take into account the time spent by the owner and/or his employees in the maintenance work. When taken together with other work carried out in the business, the evidence might lead us to conclude that the majority of work done is involved in maintaining the value of the owner’s investment. If so, then we would seek to deny the claim under IHTA84/S105 (3).

The judgement in George also suggests that the holding of land as an investment is separate and distinct from the service element of the business. Finally, when looking at the facts ‘in the round’, trading figures are only a part of the overall picture.

When dealing with a claim for business relief on a caravan park, you will need to obtain detailed business accounts, including breakdowns of both the income and expenditure between the investment and non-investment elements of the business. In addition, you should ask the taxpayers to state precisely what services were provided to the park residents and how long was spent by the deceased (as park owner) and his partners and/or employees providing those services.