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Advantages of Gifts of Agricultural Property into Trusts

Trusts have always been a favoured mechanism for long term protection of family assets.

At present Trusts are viewed as offering shelter from both the divorce lawyer and the local authority seeking to recover long term care fees.

Where an individual gifts assets into a Trust, two different tax charges are triggered:

  1. A chargeable lifetime transfer if the gift and any other gifts to Trust in the preceding 7 years exceed £325,000
  2. A capital gains tax charge. The lifetime transfer tax mimics the inheritance tax regime.

Advantages of Gifts of Agricultural Property into Trusts 

Interestingly however, the advantages of gifts of agricultural property into Trusts include:

  • Exemption from a chargeable lifetime transfer, as agricultural property relief will be available
  • The fact that any transfer into a Trust is eligible for holdover relief which will sidestep the capital gains tax charge. A holdover claim reduces the base cost of the property so that on a future disposal of the asset the cost deduced from the sale proceeds to calculate the gain is not the value of the asset at date of gift, but the donor’s own original cost of acquisition of the asset. This original cost could date back many years before the asset was put into Trust.

This all seems very attractive but there is a major drawback:

Quite often the valuable family asset in question is a farmhouse. And a holdover claim for a dwelling held by a Trust has the effect of denying the precious capital gains tax exemption on a future disposal of the dwelling, the Principal Private Residence Relief.

It is usually a considerable shock for the beneficiaries to sell their home many years later and unexpectedly find that they have a capital gains tax liability. So, when transferring a home into or out of a Trust it is worthwhile to consider waiving the holdover tax relief available, and paying the capital gains tax.

For more information on the advantages of gifts of agricultural property into Trusts and other Inheritance Tax Planning measures, please contact Rawlinsons on 01733 568321.