How The Family Farm Can Be Put In Trust

HOW THE FAMILY FARM CAN BE PUT IN TRUST AND CLAIM AGRICULTURAL PROPERTY RELIEF (APR)

How to be a retired farmer and pass the farm to family with APR and also qualify your retirement residence for a tax efficient estate, whilst protecting the property from being sold to pay for care home fees.

1. The Family Trust

a. By virtue of your Will a Trust can be created for future generations of Beneficiaries, with a simple qualifying requirement to come of age to take a benefit, or other qualifying requirement.

b. The Trust is a Bare Trust as the Beneficiary has the access to the Capital (sale proceeds) and the income (rental income from the Trust).

c. Care should be taken when analysing wording to determine if a particular Trust is Bare. For example, the HMRC Trusts, Settlements and Estates Manual contains examples and within such an example of a Bare Trust;

i. Is the qualifying Beneficiary entitled to an equal share in the residue of the estate?

ii. Are there other conditions that they must fulfil before they become entitled.

iii. The direction about income does not affect this basic position. The Beneficiaries have a vested interest, and the Trust is a Bare Trust.

iv. The income ought to be returned as the Beneficiary’s own income and not that of the Trustees.

2. Taxation of a Bare Trust

a. The tax treatment reflects the fact that the Trust is effectively ignored.

b. Indeed Bare Trustees originally did not need to register such Trusts on the Trust Registration Service (TRS). That is no longer the case as Bare Trusts now need to be registered unless specifically excluded as an excluded express Trust.

c. Inheritance tax (IHT)

A Bare Trust is not a ‘settlement’ for IHT purposes and therefore a gift to a Bare Trust is a Potentially Exempt Transfer (PET) with the Trust Fund then falling inside the Estate of the Beneficiary.

d. When Capital Gains Tax might be payable ff assets are put into a Trust

Tax is paid by either the person selling the asset to the Trust or transferring the asset.

e. If assets are taken out of a Trust

The Trustees usually have to pay the tax if they sell or transfer assets on behalf of the Beneficiary.

There’s no tax to pay in Bare Trusts if the assets are transferred to the Beneficiary.

f. A beneficiary gets some or all of the assets in a Trust

Sometimes the beneficiary of a trust becomes ‘absolutely entitled’ and can tell the Trustees what to do with the assets, for example when they reach a certain age. In this case, the trustees pay Capital Gains Tax based on the assets’ market value when the Beneficiary became entitled to them.

3. Agricultural property

a. You can pass on some Agricultural Property free of Inheritance Tax, either during your lifetime or as part of your Will.

b. Agricultural property that qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals. It also includes:

  • growing crops
  • stud farms for breeding and rearing horses and grazing
  • trees that are planted and harvested at least every 10 years (short-rotation coppice)
  • land not currently being farmed under the Habitat Scheme
  • land not currently being farmed under a crop rotation scheme
  • the value of milk quota associated with the land
  • some agricultural shares and securities
  • farm buildings, farm cottages and farmhouses

c. These do not qualify for Agricultural Relief:

  1.  
  • farm equipment and machinery
  • derelict buildings
  • harvested crops
  • livestock
  • property subject to a binding contract for sale

d. Farmhouses & cottages

Buildings must be of a nature and size appropriate to the farming activity that is taking place. The property is valued as if it could only be used for agricultural purposes. Any value over and above this ‘agricultural value’, such as the market price of a country residence, does not qualify for Agricultural Relief.

A cottage or farmhouse must be occupied by someone employed in farming or:

  • a retired farm employee
  • the spouse or civil partner of a deceased farm employee
  • They must occupy the property as a tenant under a lease granted as part of their former employment contract

e. Rates of Agricultural Relief

Agricultural Relief is due at 100% if:

  • the person who owned the land farmed it themselves
  • the land was used by someone else on a short-term grazing licence
  • it was let on a tenancy that began on or after 1 September 1995
  • Relief is due at a lower rate of 50% in any other case.

4. THE RETIREMENT BUNGALOW

When you retire, plan ahead to own the bungalow as Tenants in Common in equal shares with your spouse and create life interests to live over each other’s share by creating Trusts.

Ensure your farmhouse is let to the Tenant Farmer as a dwelling.

The property cannot be sold to pay for care home fees in the event one of you goes into care.

The additional tax efficiency comes in addition to the APR because:

You have a nil rate band of £325,000.00 with the addition of the Residence Nil Rate Band (RNRB) of £175,000.00. You therefore have £500,000.00 value in your estate before tax is levied at 40% on those sums above that do not have the benefit of any relief.

This could be applied to a retired farmer living in a bungalow off site of the farm, but the farm is retained in their name and rented out, subject to a formal Agricultural Tenancy Agreement.

The Will seeks to protect assets from care home fees but needs to also qualify for tax savings.

Put the farm in the Will Trust and ensure your home (bungalow) goes to linear descendants (children/grandchildren) to have the most tax efficient estate.

Linear Descendants that qualify Trust property for the additional RNRB must be under the age of 25 years old to qualify, but the list is broad, Linear Descendants shall mean:

  • a great grandchild
  • a grandchild
  • a child
  • a spouse or civil partner of the above (including their widow, widower or surviving civil partner)
  • a child who is, or was at any time a step-child
  • an adopted child
  • a child who was fostered at any time
  • a child where the Settlor is appointed as a guardian or special guardian for that child when they’re under 18
    • a spouse or civil partner

OF the Settlor

The Residential Nil Rate Amount Period means the period ending 2 years less one day from the date of death of the Settlor, so a child born as a class of Beneficiary above, that is a potential Beneficiary of the Trust, would then qualify the Trust, so long as they were born 2 years less one day AFTER the Settlor has died.

5. FARMHOUSE APR V BUNGALOW RNRB

There is no definition of a farmhouse, however, case law establishes that “a farmhouse is the place from which the farming operations are conducted”; or “a dwelling for the farmer from which the farm is managed”

 You must then ask, who is the farmer? A house occupied with a farm is not a farmhouse simply because the person living there is in overall control of the agricultural business conducted on the land.  

The farmer is someone who farms the land on a day-to-day basis, but if the farm is only subject to grazing licences with limited duties, ‘farmer’ is hard to qualify as the title.

The contract farmer or agent of the retired farmer is left to make all the decisions, it is unlikely the property would be accepted as a farmhouse.

Make sure to have a formal Agricultural Tenancy with the farmhouse occupied and get this to go further ensuring to hold meetings within the farmhouse itself, and have the location documented within the minutes. Records should then be kept for a minimum of 7 years.

Contact De Rossi Griffiths Today

For bespoke advice for your farming estate planning, get in touch with us today, so we can plan an efficient estate for your Beneficiaries.

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