Agricultural Relief and bringing a lifeime trust to an end


I have a situation where a mother and daughter farm under a partnership agreement. The daughter wants to develop the farm and will need to mortgage the farm. At the moment the mother has a life interest and the daughter and her sister are the remaindermen. The mother wishes to remain in the farm house. I am concerned about this being a PET and whether or not they would get APR , I am also concerned about CGT. Does anyone have any other suggestions of ways in which farms secure loans . The only other alternative would be the sale of the farm.

Collette Hodkinson

CPH Solicitors

(Carlton Collister) #2

A number of issues are raised here and there is insufficient information to provide other than pointers and the following is not exhaustive:

  1. A trust can usually borrow funds (provided that the trust instrument has this power) and this will be a matter of finding an appropriate lender, or perhaps being able to locate the appropriate person within the lender. There will be additional complexity for the lender and associated cost, but I have clients using Barclays and Lloyds, so I am sure that other lenders will also be available to deal if it meets their criteria.
  2. As a life interest trust, the repayment of capital on borrowings will need to be considered and might be funded by a loan by the life tenant, but care is needed to document this appropriately (for example, it might be interest-free and repayable on demand).
  3. Self evidently, whether Inheritance Tax reliefs remain available following development depend on the nature of the development and the structure of the business. APR can be lost on the farmhouse if it is no longer of a character appropriate to the farming trade.
  4. Capital Gains Tax is only an issue if property is transferred from the trust. Provided that all conditions are met, holdover relief should be available on property that is a trading asset or qualifies for APR. This might suggest that property is transferred from the trust prior to development, if it is to be subsequently developed for a non-qualifying purpose, so that holdover relief would be denied.
  5. If property is transferred from the trust this will be a PET, and although relief may be available at the time of transfer, this may be lost if the donee does not qualify for relief on the donor’s death.
  6. Depending upon how the the factors in the BPR cases of Farmer and Brander might be applied to the current situation, a continuing partnership structure might allow some development, with BPR being available at 50% on property not qualifying for APR.

Carlton Collister
landtax llp

(Simon James Northcott) #3

If the debt is secured against the farm, this will reduce the reliefs, and may do so now even if not secured against the farm.

Simon Northcott

(Paul Saunders) #4

Carlton has identified the potential for APR to be restricted.

When considering development of property which qualifies for APR, it is important to remember that APR only applies to the agricultural value of the land in question. If the land is valued at, say £2,000 an acre for agricultural purposes, but £100,000 an acre as development land, APR will be limited to a maximum of £2,000 an acre.

If there is likely to be a significant uplift in value with no corresponding uplift in available IHT reliefs, it might be appropriate to consider winding up the trust with the land passing to the remaindermen, thus trying to secure the maximum APR relief before initiating any development. However, this could be allowing the “tax tail” to “wag the dog”!

Paul Saunders