Succession Planning

Succession planning for Park Owners: Facing the future
Len Bell and Louise Highton of Montpelier Professional Limited discuss the key issues to be faced and highlight the merits of planning ahead. They recommend that you do not delay; draft your exit plan then explain and discuss it with those affected.  They urge you to instruct suitably qualified and experienced professionals to advise you on implementing your plan in a tax efficient manner in order to retain family wealth.
It's a question that all park owners have to face: how are we going to pass on the business when it is time to move on?
The benefits of getting it right
Succession planning is fundamental to the success of a business, almost as critical as anticipating cash flow needs or turnover. If this is poorly managed, the value built-up in a business over years can be lost along with the family’s wealth.
Transferring ownership can be highly emotional and complicated, which is often why it is ignored until it becomes a pressing issue, such as when an owner becoming ill or too old to  continue running the business.
Review the options
Good succession planning involves an owner considering three options: selling up, family buy out, or passing the business down to the next generation.
In practice, the plan may call on a combination of these, however each are considered separately to illustrate the essential features.

Option 1: Selling Up
Choosing to sell the caravan park can be the most difficult decision for owners who have invested so much over the years to build their business.  That decision is made more difficult in the current market where there are fewer buyers and lower prices.  There is significant demand for parks but the transaction log jam reflects the different perceptions of value, not only of buyers and sellers but also of valuers and bankers.
Nevertheless, a good price can be achieved by parks displaying strong maintainable cash flows from the existing business – hopefully, enough to satisfy the aim of having sufficient retirement income and wealth to pass to the next generation.
If owners believe that the family’s wealth and happiness can best be preserved by selling the business, this difficult decision can come as a great relief to the family.   The focus then becomes securing the best price and retaining as much of the proceeds as possible.
Tax Savings (Note 1)
When selling a business the immediate concern is

capital gains
tax.  The current rate of capital gains tax is 18% (time of writing February 2010).  Whilst this rate may seem relatively low in comparison to income and inheritance taxes it can still give rise to a substantial bill given that the typical retiree will have owned the asset for a considerable period during which there has been significant capital appreciation.  By planning ahead, owners can maximise the tax relief’s that are available, a point that will become more important as the 18% tax rate is predicted to increase.
 
Entrepreneurs Relief (ER) is the main relief available for individuals selling a business; it reduces the effective rate of tax on qualifying business disposals from 18% to 10%. ER is subject to a lifetime limit of £1m of qualifying gains per person.  Careful planning in this area can produce significant tax savings.  As an example, assume a £2m capital gain on the sale of a park in the name of one spouse, this produces a tax bill of £278,182 after all reliefs.  If the park had  been owned by a husband and wife equally, in partnership, the tax bill would be £196,364 – a saving of £81,818. This is a relatively simple example, more complex restructuring can achieve greater savings for the family, however, we recommend that you seek professional advice specific to your particular business and circumstances before undertaking any restructuring of your business.
The whole area of ER is relatively new and requires careful planning; there are a number of conditions that businesses need to meet to qualify, we recommend that you seek professional advice at an early stage. To be eligible for the relief park owners will need to satisfy HM Revenue & Customs (HMRC) that their business is a trading business and not a property investment business. It is important to ensure that your accounts demonstrate or bring out the trading features of your business, in order to present the best case. ER comes with a one year ownership qualification period therefore it is essential that you take professional advice from a specialist in this area well in advance of marketing your business for sale.

Option 2: Family buy out
A family that has owned a business for one or two generations has a legacy that they are typically enthusiastic to continue. One way to realise the value of your caravan park while keeping the business in the family is through a family buy-out.
While the acquisition market is stalling, a family member with a substantial equity stake and a track record of delivering sustainable revenue is more likely to raise finance.
However, a stumbling block to this exit route can be that family members fail to agree a price. To ensure a smooth succession, an independent valuation and an acknowledgement that, in the current market, this might be the best price available is important. When the family owns more than one park, the solution can be to split the business between family members and we have seen many successful examples of this.

Planning the business structure
Having agreed the plan, both parties need professional advice to ensure that the exiting family member retains as much of the proceeds as possible, and the buying family member structures the business so as to mitigate future taxes. Again, planning for both buyers and sellers can maximise the after-tax wealth retained by the family.

Option 3: Passing the business down to the next generation
In our experience, there is a strong desire amongst park operators to pass wealth down to the next generation.

Outline Plan
If this is the aim, then the first step is for the current owners to set out, in their own words, how they want to devolve their wealth, including the family business. An essential ingredient of the plan must be a desire by the next generation to carry on the business. As a minimum, the plan should consider the following: a summary of assets and liabilities; directions on how the wealth is to be divided; the identity of family members who will be responsible for running the business in the future; the desired retirement process and target retirement income.    
The plan should then be explained to the beneficiaries. This is a most important step, as it provides a forum to discuss concerns and anxieties about the process. At this stage, the park owner can then hand this plan to professional advisers so that they can help to minimise the tax bill.
 
Tax  Planning (Note 1)
The aim of tax planning is to minimize the total tax bill, so your advisors will need to consider all the relevant taxes and your planning should include a thorough review of your will. Here, we briefly flag some

Inheritance Tax
(IHT) issues.
Are you trading or property investing?

This may seem a strange and academic question to most park owners who might reasonably regard running a park as ‘trading’. However, the most important relief from IHT is Business Property Relief (BPR) but this is not always available to park operators. The difference in view between the taxpayer and HMRC has resulted in several important cases concerning caravan parks and the availability of BPR. Some have been decided in favour of the taxpayer and some in favour of HMRC.

The most recent case on this issue ‘Stedman’ was decided in favour of the taxpayer and it provides a useful model for analysing the park owners business, in order to evaluate the chances of qualifying for BPR.

Moreover, this means that when preparing to transfer the business, it is important to ensure that your accounts demonstrate or bring out the trading features of your business.  The ownership of land is also an important issue as incorrect ownership could lead to a reduction or loss of BPR.  Park owners should seek advice from professionals with experience in the sector, to ensure that they are able to present the best case.
 

Hedging your risk
For businesses qualifying for BPR, passing the business to the next generation on death can be extremely tax efficient as in addition to 100% relief from IHT there is no capital gains tax when an asset is passed on death. However, you have to question whether it is wise to adopt this as your only strategy.
Even if there are reasonable prospects of BPR at present, an unfavourable court decision or a reduction or removal of the relief by a government seeking tax receipts can undermine your plans. It can also make good business sense to start transferring a share of the business to the next generation - the motivational benefits of this should not be underestimated.
Despite the success of ‘Stedman’ uncertainty still remains. For those seeking greater certainty and a smoother transition, lifetime planning options should be considered as a method of hedging or eliminating IHT.  There are options available that do not rely on trading status, and it would be wise to seek professional advice on these at an early stage.

Recommendation
Do not delay - plan ahead. In order to retain family wealth draft your exit plan and instruct suitably qualified and experienced professional to advise on implementing your plan in a tax efficient manner.  
(1)The above tax rates, reliefs and examples were prepared prior to any formal announcement of a March 2010 Budget. However, rates and reliefs may change in the Budget and should not therefore be acted upon without first taking appropriate professional advice.

(2)This article provides only a brief overview of the tax aspects of succession planning. This is a complex area of tax planning; you should not take any action or refrain from taking action without first taking suitably qualified professional advice on your specific circumstances.

Editors Note: Len Bell has 30 years industry experience including 19 years as Financial Director of leading park operator Haulfryn Group. He has recently joined Montpelier Professional Limited heading up the leisure team in the North. Louise Highton is a tax director at Montpelier Professional Limited she specialises in capital taxes and has had significant experience in dealing with HMRC enquiries involving BPR for park owners.