IHT cut a winning package for self-storage businesses

<p>The prime minister and the chancellor appear to share a new year’s resolution, with both outlining in interviews that tax cuts are a priority. The chancellor has also confirmed that he considers <a href="https://www.telegraph.co.uk/money/tax/inheritance/chancellor-inheritance-tax-pernicious-hint-at-cuts/">inheritance tax to be ‘pernicious’</a>. Whilst a cut in the headline rate of inheritance tax (IHT) may be a tempting measure for the chancellor to include in his Budget announcements, there may be some unforeseen consequences of such a move. For example, could we see more people look at establishing businesses where IHT has traditionally posed an issue?</p><p>Amongst those taxpayers most likely to welcome such a move are property-related businesses, such as self-storage businesses. There has been a <a href="https://www.thebusinessdesk.com/westmidlands/news/2076222-the-uk-self-storage-industry-is-booming-and-investors-have-noticed">reported boom in the self-storage sector</a> in the last few years, with hybrid working meaning more space is needed at home and inflated rental prices forcing people to downsize and put belongings into storage.</p><p>However, IHT can pose a risk to such businesses as it is not always clear they qualify for business relief (BR), so 40% tax could be due on the business’s value on the death of the owner. In contrast, BR can provide 100% IHT relief on certain types of business property, such as shares in certain unlisted companies. It’s arguably the most valuable and important tax relief for business owners and families when considering succession planning.</p><p>In broad terms, the relief is aimed at businesses that are ‘wholly or mainly’ trading. Generally, ‘wholly or mainly’ is interpreted as more than 50%. It’s therefore vital to determine whether the activity of a business is trading or investment which can be tricky where property makes up a large proportion of the balance sheet. A hotel business is likely to qualify for BR whereas a buy-to-let business most likely will not.</p><p>The case of <a href="/content/dam/media/judgmentfiles/j12859/tc08949.pdf">Butler and others vs HMRC</a> provides a useful example of this uncertainty, with the case determining that a wedding venue was more akin to a village or community hall and was not comparable to a fully serviced conference venue. When considering other businesses that this case may apply to, good examples include companies in the self-storage sector.</p><p>As self-storage businesses will usually own warehouses which contain storage units, it may prove difficult to demonstrate to HMRC that they are wholly or mainly trading and may be treated as investment companies. Consideration must be given to the services provided to those ‘renting’ the space beyond a physical place to use, such as selling boxes and packing materials. Where it can be evidenced that non-investment services exceed 50% of the storage ‘rental’ service, the entity could be considered as a trading business.</p><p>HMRC will only undertake an advance review of a company’s BR status in limited circumstances and the uncertainty could put some off from pursuing such a venture. If the rate of IHT is significantly lowered however, as is reportedly under review in Downing Street, then we could see a race for space as more jump on the self-storage bandwagon.</p>