Over the years trusts have, with some justification, been criticised usually on the basis of complexity and expense. There is a lot to be said for simplicity and serious consideration should always be given to gifting shares in the business and in the farm to the next generation. Various concerns (not least matrimonial) may weigh against it.
Transferable nil rate bands encourage simple Wills, leaving all to the surviving spouse on the first death. But, what if the 100% APR/BPR should no longer be available by the time of the survivor’s death? Maybe the exempt assets from the first estate should pass to the next generation, but worries may persist about providing for the surviving spouse and also concerning childrens’ marriages.
If so, there is a strong case for directing the exempt assets from the first estate to Discretionary Trust for the benefit of the surviving spouse and descendants. The Trust will not count as part of the taxable estate on the death of the surviving spouse, but it should only be used after careful discussion of the pros and cons with professional advisors. In a recent case Stuart Thorne, Head of Private Client at Clarke Willmott Solicitors set up a series of 20 such lifetime Trusts to act as receptacles for exempt assets on the first death, in the expectation that each Trust would be worth about £300,000 and below the threshold for the 10 yearly periodic inheritance tax charges which apply to such Trusts. If assets worth £3m are diverted into these Trusts after the first death, and either reliefs were subsequently abolished or the Trustees were to “sell-up”, the IHT saving compared with the situation if the surviving spouse still owned the lot would be up to £1.2m!
Discretionary Trusts can also be particularly useful for the transfer of land with long term development potential. Until land is actually zoned for development, values may still be relatively modest and holdover elections for CGT can be made on transfers into Discretionary Trust. Care needs to be taken before transferring more than £325,000 worth of non-agricultural value into such a Trust, otherwise an immediate inheritance tax bill can result! In a recent case of a 40 acre block of land with hope value for future development, agents valued the land at £20,000 per acre with the agricultural value being £7,000 per acre. The parents owned the land jointly and each set up a life time Trust and transferred their half share into that Trust for the benefit of the children and remoter descendants. The partnership will be paying the Trusts a full commercial rent for occupation of the land pending any development. Holdover elections can ensure that no CGT is payable and the potentially substantial future growth will be outside the parents’ estates. A further sweetener is that is that rents received by the Trusts can be used to help fund grandchildren’s school fees.
Daniel Eames, Partner at Clarke Willmott specialises in dealing with complex farming family issues. He advises that the use of trusts can also give some protection against childrens’ divorce settlements, although Family Judges are notoriously able to make awards which seem beyond their powers! However, it would now appear that those wishing to pass assets down to the next generation can seek protection from divorce if their children have a prenuptial agreement or postnuptial agreement with their spouse. In October of last year, the Supreme Court of England and Wales ruled in favour of a German woman who sought to limit the financial provision for her spouse via a prenuptial agreement. This case opens up the possibility of ring fencing inherited assets and making property settlements which only benefit a spouse whilst the children are in education. This is a far cry from the usual 50:50 division which can lead to farms being split up and/or the farming business being crippled by debt in order to fund a divorce settlement.
Ideally the agreement should be entered into before marriage (known as a pre-nuptial agreement) but even where the parties are already married a subsequent agreement (known as a post-nuptial agreement) can be just as effective. Thus where a son or daughter already has a spouse and children, a post-nuptial agreement is likely to provide security for a parent who wishes to transfer a farm to that son or daughter.
In either case, both parties should have independent legal advice and the agreement should provide for the financial needs of the other spouse (and any children). Importantly though the agreement can limit these needs to the use of the farmhouse or a farm cottage whilst there are minor children. There may be some practical issues to overcome but this must be viewed as a significant improvement on the potential outcome without an agreement.
This change in the law allows parents who were previously reluctant to pass down their assets to their children because of fears of a future divorce to take full advantage of the tax planning outlined above.
So there is a lot that can be done with the right help and advice in protecting the farm for future generations but it is vital that the best structures for each circumstance are discussed and put in place sooner rather than later.