The risky business of festivals

The UK’s 2024 festival season is off to a rocky start, with over 40 events either cancelled or postponed this year already. This is perhaps unsurprising with the many unknowns that festival organisers face; just think of the good old British weather!

And it’s not only the UK festival scene that is facing problems. Tyler the Creator pulled out of Lollapalooza in Chicago and Outside Lands in San Fransisco, leaving both festivals without a headline act.

Considering the level of uncertainty faced by festival organisers, there has never been a greater need for cash reserves. You only need to watch Fyre: The Greatest Party that never happened on Netflix to see just how spectacularly festivals can fail when they run out of cash.

It is little wonder, therefore, that Glastonbury Festival’s Company Accounts showed cash reserves of over £6 million last year. However, for those businesses not holding an outdoor event for over 200,000 people who are quite literally “saving for a rainy day”, then having too much cash on the books can be problematic as far as inheritance tax is concerned, thanks to the restrictions on inheritance tax relief that apply to “excepted assets”.

Inheritance tax and the importance of business relief 

Inheritance tax (IHT) is charged on death at a rate of 40% on the value of a deceased person’s estate, which is over their available nil rate band (NRB) and residence nil rate band (RNRB) allowances, unless an asset qualifies for a relevant exemption or IHT relief. It’s also charged in certain circumstances on lifetime gifts. IHT is a highly unpopular tax, due in part to the perception of it being a double taxation of earnings.

However, for those holding business assets, then provided that certain conditions are met, these assets may qualify for “business relief” from IHT. For assets that qualify for business relief, the charge to IHT is reduced by either 50% or 100%. The precise conditions for securing the relief are beyond the scope of this insight, but broadly speaking, business relief secures a 100% reduction in IHT for an interest in a trading business that has been held for two years, and a 50% reduction on assets owned personally but used for business purposes for two years.

By way of illustration, Paul dies with an estate valued at £2,000,000. He has a full NRB and RNRB available, and his wife has predeceased him with a full transferrable NRB and RNRB. This means that Paul’s estate has £1,000,000 of IHT allowances. In addition to this, Paul has an interest in a trading business valued at £1,000,000. The business qualifies for business relief at a rate of 100%, meaning no IHT is payable at all on Paul’s estate. In this example, business relief results in a of saving £400,000 in IHT. Great right!

Business relief also affords lifetime planning opportunities, as it can enable qualifying assets to be transferred into trust during lifetime without giving rise to an immediate inheritance tax charge.

All in all, business relief is a hugely valuable IHT relief to secure for those holding business assets and who have a taxable estate.

But beware of excepted assets

For those holding business interests that are hoping to secure this precious relief, they need to ensure that they are aware of the rules relating to “excepted assets”. Excepted assets are generally assets which have not been used wholly or mainly by the business (for business purposes) throughout the two-year period prior to the deceased person’s death, or assets which are not required for future use in the business. Where HMRC considers an asset to be an excepted asset, the result is that the value of this asset is left out of account for the purposes of calculating business relief. This is so people aren’t benefiting from business relief on private assets. Such assets could include properties or vehicles which are not mainly used for the business.

One of the most common “red flags” is that excepted assets is excess cash on company books. Where cash is regarded as an excepted asset, this can have a severely detrimental effect on the overall IHT position.

Using the example of Paul above, if half of the value of his £1,000,000 business was held as cash and this cash was deemed to be an excepted asset then, this would result in an additional £200,000 of IHT being payable.

Securing business relief on cash often comes down to whether it can be proven that the cash is required for ‘future use’ in the business. The “future use” test was analysed in Barclays Bank Trust Co v IRC, in particular the meaning of “future” and “required”. It was not accepted that “future” means at any time in the future (ie it can’t be that the cash will be used in maybe 7 years’ time). It was also concluded that “required” implies an imperative that the cash will be used on a given project or for some other planned or palpable business purpose (ie for the relief to apply, a business can’t be holding cash indefinitely “just in case”). 

While Glastonbury Festival may be able to prove that saving “for a rainy day” is required for a palpable business purpose, others are unlikely to be so lucky with this argument.

Advice to business owners

For businesses/business owners who are holding substantial amounts of cash (or whose cash balances are set to increase to a level where they may be regarded as an excepted asset) the key is to ensure that you take proper estate planning advice, and the earlier this advice is taken, the better.

If you wish to discuss the availability of inheritance tax reliefs in further detail, please speak to your usual Mills & Reeve contact for further details of the planning or contact one of our specialists here.