Why a trust can help protect your family and farm business

Farming assets are valuable, but they can often be vulnerable to being broken up. Charles Cowap, independent rural chartered surveyor and principal Lecturer at Harper Adams University explains how a trust can help.

Sadly, the family itself can be the biggest threat to farming assets. But a well-designed trust can help if or when such a threat materialises so that farm property is protected for the longer-term family interest. A good professional review from an experienced team is essential before committing to a trust.

What is a trust?

A trust comes into being when a “settlor” (normally the original owner) hands over control of assets to trustees, who become the legal owners of the assets. 

Trustees are responsible to the trust’s “beneficiaries”, who may have a right to income, capital, or both from the trust. They must act in the best interests of the trust and the beneficiaries at all times.

There are many different types of trust, but the maximum life of any new trust is 125 years.

They can be set up during the lifetime of the settlor, although It is common for a trust to come into being through this person’s will when they die, often called a “will trust”.

Why we like trusts in rural property management

  • Long-term asset protection
  • Flexibility
  • Privacy and confidentiality

And why we don’t like them:

  • Surrender of control to trustees
  • Complex
  • Expensive
  • Tax implications

How can a trust help farming families?

Trusts can provide for a surviving spouse while directing that in the longer term the assets will revert to a future generation of the family.

This can ensure succession from one generation to the next and lessen the danger that assets might be “diverted” on the remarriage of a spouse.

Trusts can also reduce the risk that property may be lost to the family through divorce, business partnership breakdowns or indeed profligacy within the family itself. 

Younger or more remote family members can benefit from the assets in a trust without giving away ownership or control to them. The trust can be set up to give automatic entitlement to income, or to leave this to the discretion of the trustees. Or capital can be passed on to the next generation when the successors are ready.

So everybody should have a trust?

No. Trusts are complex and can be expensive to administer. Set-up costs may be between £5,000 and £10,000 in legal and other professional fees, although if the trust is set up through a will, costs will be lower.

In addition, as farming businesses change, so must a trust, and therefore the annual cost of servicing such an arrangement is often £2,000 upwards. Professionals outside of the family are increasingly being appointed as trustees and payment of their time must be factored in.   

Also consider that the original owner gives up control of the asset and, strictly, has no further responsibility or involvement. This won’t be important for a will trust created on death, but it can be irksome for a trust set up during the owner’s lifetime.

Tensions can arise and trustees can find it difficult to balance the competing interests of beneficiaries. A clear statement from the settlor of his/her intentions can be helpful in this situation.

What about tax implications?

How do I know if a trust is for me?

Review your family and business situation with an accountant, solicitor and rural chartered surveyor/land agent who are experienced in working with trusts. Ask yourself:

  • Are there younger or elderly family members who might need to be supported? Can the assets reliably generate enough income for this?
  • Are you already facing higher rates of tax?
  • Might vital assets be vulnerable to an unexpected death, divorce or remarriage?
  • Is the outlook for family succession and longer-term interest uncertain?
  • Are you happy to give up ownership and control?

Setting up a trust can lead to a simultaneous charge to inheritance tax (IHT) at 20% and capital gains tax (CGT) if the trust is created in the settlor’s lifetime rather than on death. This can be avoided by using reliefs such as agricultural property relief (APR), business property relief (BPR) and a special holdover relief.

APR and BPR can reduce the value of property for IHT, so any tax payable is virtually nil. Holdover relief defers the payment of CGT, sometimes indefinitely for practical purposes.

Trustees must plan for an IHT payment every 10 years at 6% of the market value of the trust’s assets – again this can be relieved by APR and BPR where the assets qualify.

Most trust income is taxed at the highest rate, currently 45% and CGT is applied on any sale of the assets by the trustees.

Each business and family is different, so anybody considering a trust must take the best tax advice. 

There will be many questions to consider before creating a trust, but if the answer to the questions in the box right) is yes, then a trust is worth serious consideration. Take good advice –  trusts are definitely not a DIY option.

Glossary of terms

Settlor: The original owner who transfers the property into a trust for the benefit of others, typically other members of the family.

Trustee: Legally the owner of the assets in the trust.  Responsible for their management on behalf of the beneficiaries, but cannot benefit personally from the assets (other than the reasonable fees of a professional trustee).

Beneficiary: May receive income or capital from the trust, depending on its terms according to the trust deed itself and the decisions of the trustees. Typically widowed spouses or children including future generations not yet born.

Are you, like many other farms, missing out on tax claims for R&D?

If you’re a limited company, you could be eligible for tax credits if you’re carrying out R&D on your farm. For more information and to find out if you’re eligible visit our R&D tax credits page.

Find out more