Farmers face restrictions on trusts to protect inheritance

Farmers using trusts to limit future inheritance tax bills might need to reconsider their succession strategy under new rules.

HMRC proposals would stop individuals setting up a new trust every seven years – each of which would qualify for the £325,000 inheritance tax exemption.

The new rules would mean an individual would only receive one exemption or “settlement nil-rate band” (SNRB) for trusts.

Any trusts set up before 6 June 2014 should not be affected but those established after that date would have to clarify which assets that exemption was allocated to.

Farmers with let properties or investment portfolios, which do not receive agricultural or business property relief, would be most affected.

See also: Farmers urged to avoid high tax bill from land with planning

Catherine Desmond, partner at accountant Saffery Champness, said trusts remained an important succession tool, particularly when someone was not sure where they wanted the inheritance to end up.

“It is basically a tool out of the toolkit,” she said. “They will only get one bite of the cherry of moving the things that do not have any [agricultural or business] relief.”

“A lot of people won’t realise they made their wills under the current rules and if the rules change anybody who made a settlement or has one in their will needs to look again.

“It is not to say you shouldn’t use trusts for tax planning, it just narrows the scope.”

Mrs Desmond said the changes could lead to a rise in lifetime giving.

If the farmer lived at least seven years after the gift they could avoid inheritance tax but there could still be a capital gains tax bill.

Andrew Vickery, head of rural series at accountant Old Mill, said people should not panic but consider the family farm’s exposure to inheritance tax as soon as possible.

“The process of passing assets over is likely to take longer as a result of the changes, if significant tax charges are to be avoided,” he said.

Hypothetical case study

A father owns two let cottages given to him a long time ago by one of his relatives, valued at £300,000 each.

They provide a nice steady rental stream to supplement income from the farm and he finds this a comfort in difficult years.

If he wants to pass them on to one of his children, he could make a lifetime gift that might escape inheritance tax if he survives for seven years, but it is likely that there will be a large capital gains tax bill.

He could leave them to a child in his will, but this would potentially cost 40% of the value in inheritance tax as no relief is available

If he wanted to use trusts, he could set up a trust now and transfer one cottage in using his nil rate band.

He can hold over the gain for capital gains tax purposes so that there is no loss of tax upfront.

If he lives for another seven years he can then repeat the exercise with the second cottage (assuming the value is still below the nil rate band) – again with no immediate loss of tax.

He can use discretionary trusts if he is not sure which child should eventually benefit or if he wants to be able to benefit more than one.

Under the proposed new rules, he would only be able to transfer one cottage into trust without incurring capital gains tax costs.

A transfer of the second cottage into trust would give rise to a 20% inheritance tax (assuming he survived by seven years, if not it might be as much as 40%), which would need to be funded from his other assets.