Whether you have a legal, tax, insurance, management or land issue, Farmers Weekly’s Business Clinic experts can help.
Here, Carol Ward, solicitor, Thrings, explains the pros and cons of using a long-term trust to protect farming assets.
Q My wife and I are in our reclining years with our younger generation managing the estate. On our deaths we are considering putting the farm into a single 125-year discretionary trust, managed by our offspring.
We would like to know what does this involve? What are the drawbacks and advantages? What are the tax implications?
A On the face of it, there would be no difficulty in putting the farm into a discretionary trust on your deaths.
This could be achieved by drafting your wills to ensure that, on the latter of either your death or your wife’s if she survives you, the estate passes to a discretionary trust that would be managed by your children as trustees.
One advantage of putting the farm into a discretionary trust is that there is some control over the ultimate devolution of the farm.
By placing it into trust, the estate can be kept in the family and can be passed down to the next generation by including future grandchildren and great-grandchildren within the class of beneficiaries.
The younger generation would then be able to continue managing the estate.
Another advantage is that the farm would not fall into your children’s estates for inheritance tax and it would also be separate from their personal assets in the event of a marriage breakdown.
A disadvantage of a discretionary trust is that the trust does need to be formally managed, with trustee meetings held and accounts prepared.
There is an administrative burden that would not exist if you passed your estate to your children outright.
Over recent years, there have also been numerous regulations brought in that impose a more onerous compliance burden on trustees.
The trust will have its own nil-rate band and as a discretionary trust it will be subject to a specific tax regime, called the “relevant property regime”.
As part of this regime, the trust that you create under your wills will be subject to inheritance tax every 10 years, with the first anniversary occurring 10 years after the latter of either your death or your wife’s if she survives you.
There will potentially also be inheritance tax charges on distributions of capital from the trust.
The rate and amount of tax would depend on various factors, such as the amount by which the value of the trust assets exceed the available nil-rate band, the length of time the assets have been in the trust and also whether any reliefs, such as agricultural property relief or business property relief, are available on the trust assets at the relevant time.
The tax computations are complex but any tax charge would not exceed 6% of the value of the fund.
Trustees pay income tax at the higher rate of 45% (or 38.1% on dividend income) and would be subject to capital gains tax at 20% (or 28% for residential property).
There are certain reliefs from capital gains tax that may be available and the trustees would also benefit from an annual exemption, although this is only half of the exemption available to individuals.
There are many factors that influence clients’ decisions as to whether they wish to proceed with a discretionary trust or whether they ultimately decide to pass down their estate to their children outright.
A detailed discussion with your solicitor about your assets, wishes and family circumstances will enable you to decide whether putting in place a discretionary trust would be the most appropriate course of action for you.
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