When people hear the word ‘trust’ they tend to run for the hills. However, a trust can be a useful planning tool, particularly in a farming business.
A trust can be set up either during your lifetime, or as part of your Will. There are various types of trusts to consider, each with unique features and tax treatments. The choice depends on your specific needs and goals.
Trusts are valuable for succession planning in a farming business, allowing property to be passed to the next generation, and ensuring continuity and stability, both in lifetime and after death. They can provide for family members who may, or may not be involved in the business, allocating income and benefits accordingly. Trusts are also helpful for managing assets for minor children, allowing involvement in decisions as they mature.
Including a trust in your Will gives flexibility to your executors/trustees after death, allowing division of assets between beneficiaries according to your wishes, and their individual circumstances.
Trusts also provide asset protection in case of debt, dispute, or divorce, which you wouldn’t have with an outright gift. Provided the settlor (the individual making the gift) survives seven years post-gift, the value gifted to the trust will fall outside their inheritance tax estate on death.
Inheritance Tax (IHT)
For lifetime trusts, after allowing for any IHT relief, an individual can settle up to the maximum of the IHT nil rate band (NRB), currently £325,000, into trust every seven years without incurring an immediate IHT charge. Any excess would be chargeable to IHT at 20%.
Any IHT due on the creation of a Will trust is dealt with as part of the death estate IHT reporting.
Trusts are subject to IHT exit charges on any capital appointed out of the trust, and at every 10 year anniversary of its creation. The rate of IHT is a maximum of 6% on the value above any available relief and NRB.
Based on the proposed IHT changes to agricultural and business property relief (APR/BPR), a trust set up on, or after 30 October 2024 will have a £1 million 100% joint APR/BPR allowance, providing additional 100% relief to that of the settlor. Note that the government intends to have a single £1 million allowance for multiple trusts by the same settlor.
Capital Gains Tax (CGT)
The settlement of assets into trust is a disposal for CGT purposes and can give rise to a capital gain attracting tax between 18% and 24%. However, holdover relief is generally available to remove an immediate CGT charge, resulting in the trustees taking on the asset at the settlor’s original base cost.
Income Tax
Unless the income received by the trust is mandated directly to one or more beneficiaries, the trust will need to file annual self-assessment tax returns. The tax rate payable will depend on the type of trust.
Annual Administration
Annually, most trusts will need to prepare a trust tax return and potentially a set of trust accounts. All trusts must now register with HMRC’s Trust Registration Service (TRS) within 90 days of creation. Any changes to details of anyone associated with the trust must also be made within 90 days.
If you would like to discuss trusts further and how they could benefit your farming business, please contact one of our specialist Farms and Estates team.
