Business Clinic: Can a discretionary trust aid succession?

Whether it’s a legal, tax, finance or management question, Farmers Weekly’s expert panel can help.

Here, Harriet Neusinger a partner in Thrings’ succession and tax team, advises on how a discretionary trust can help in achieving a rational succession plan in a small farm.   

See also: Business Clinic: is permission needed to reinstate field access?

Q: We’re a small farm in Cumbria (32ha) and have three adult children. We’re 76 and 72 and are in partnership with our son who will take over the farm. The land is not in the partnership but available to use.

We all live close by and we plan to add our two daughters to the partnership as “silent” partners when necessary.

How will the discretionary trust we’ve been advised to set up with all three affect this? We’re mindful that our son will need to be able to raise funds.

A: Equality between farming and non-farming children is often difficult to achieve. While an equal financial division is often the aim, it is worth considering that while your son will inherit assets of substantial value, he will also be required to work the farm in order to produce an income from those assets.

On the other hand, your daughters will presumably inherit cash, which they are free to use and invest as they see fit.

Financial equality may not necessarily, therefore, be considered a fair outcome for all. Early conversations are key, to ensure transparency and mitigate post-death claims and complications.

To offer a more straightforward answer, I’ll assume that the discretionary trust you refer to is being created via your wills and will come into effect on the second death.

This could be limited to your farming assets, or the entirety of your asset base. The presumption is also that your overarching aim is to ensure that the farm passes to your son as a viable business (which I appreciate is crucial, due to its size), while also ensuring equality of distribution between your daughters.

Flexibility of trust

A discretionary trust is a useful vehicle in this scenario, as it allows flexibility, and can offer both short- and longer-term solutions.

The nature, extent, and value of your assets will naturally change over time and therefore the use of a trust (even for a short period) allows these factors to be assessed on the second death.

Distributions can then be made in the most tax efficient manner, and in way that suits family circumstances, at the time.

If the trustees and beneficiaries consider that there are no longer-term benefits of retaining the trust then, provided this is done within two years of death, it can be wound up with no tax implications.

Alternatively, it may be preferable for the trust to be retained for your son’s own succession planning purposes.

For example, if he has significant assets in his own right, the trust will prevent aggregation with his estate.

This is particularly important in light of the restrictions to agricultural and business property relief from inheritance tax.

Trustee decision-making

If your children are trustees, they must be able to reach decisions unanimously. If, therefore, your children have competing interests, consider whether they are likely to be conflicted in this role.

A robust letter of wishes should be prepared to accompany your wills as, while not legally binding, it will guide your trustees in your intentions in setting up the trust, and its ongoing administration.

If the intention is to raise capital from the trust assets to pay to your daughters, in order to equalise the distribution of the farm to your son, then lenders will of course want security over the land.

The lending will therefore be in the names of the trustees which, while not impossible, is more complicated than lending to an individual, and may limit your choice of lenders.

If the trustees are unable to secure borrowing, then (subject to their approval) an appointment of the land could be made from the trust to your son, for him to charge in his personal name.

This could be supported by way of an undertaking, to confirm that the appointment is contingent on payment being made to his sisters on receipt of the funds.

Alternatively, the trust assets could be loaned to your son, to enable the lending to proceed, with the trust having the ability to call in the loan if the terms of the agreement are not met. 

Note that if the partnership intends to let land from the trust, any income in the trust will be taxed at 45% and trust income tax returns will be required, unless the income is appointed and mandated to the beneficiaries.

Beware partnership complications

Adding your daughters to the partnership will ensure it can continue after your deaths, however if there is no intention for them to actively take part in the farm, their inclusion could cause added complications.

The terms of the partnership agreement are important, and should be reviewed, to ensure that the inclusion of your daughters does not adversely affect your son’s ability to run and manage the farm, and that they have no entitlement to profits or capital.

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