Our clients were already trustees of an existing trust created during the settlors lifetime for Inheritance tax purposes. This existing trust had been in existence for more than 7 years and the beneficiaries of the trust were all expecting a legacy as a result of the sale of farm assets, which would qualify for Agricultural Property Relief (“APR”) due to the death of the settlor. The settlor had died 12 months earlier thus enabling the deed of variation route to be considered.
The objectives of holding farm assets until death is that IHT relief can be claimed by the executors to save 40% tax on the entire estate. As the four beneficiaries were not keeping the farm as a going concern, the capital received as a result of the sale of the farm would then be brought into their own estates, subjecting the capital to IHT due to their total personal assets exceeding £325,000 and also £650,000 for the married couples.
The family wanted to retain control of the capital, while making immediate IHT savings. The original trust was also considered, with a view to ensuring further IHT savings, and the original trust deed was reviewed and trustees/beneficiaries reassessed.
Why the Solicitor sought to work with us/why we needed to interact with a solicitor on our client
We originally identified that our clients had inherited funds, and were expecting the proceeds of the sale of the farm, however, by understanding the circumstances of the individual beneficiaries, we were able to ascertain that all four beneficiaries would benefit from a deed of variation into a discretionary trust, to ensure that the funds did not form part of their estates for IHT purposes.
- The single beneficiary was to inherit £500,000. This would immediately be subject to IHT, as their net worth was already valued over £325,000. They had also not made any will provisions.
- The divorced beneficiary was to inherit £500,000. This would also be subject to IHT immediately, again as the net worth was valued at over £325,000; it was important to the beneficiary that their children would have some protection in place to avoid future marital disputes and claims on their estate.
- The married beneficiaries also inherited £500,000 each. They had various needs and business assets, and they wanted to avoid any capital being paid into their estates due to the complex nature of their circumstances.
In all cases, should the estate have been distributed equally in line with the will provisions, the capital would have been subject to IHT at 40%, being £800,000. This would have undone the previous planning of the parents, who had worked the farm as a going concern to ensure the APR relief at 100% was claimable from the HMRC.
What we did for the client
- We arranged bespoke deed of variations into discretionary trusts tailored for each beneficiary, as they all had differing objectives, guided by the same principles of saving IHT and still retaining full access to their capital if required.
- We arranged new wills to ensure that their assets would also be aligned to the plans arranged, and would complement their long term objectives.
- We provided advice as to how to invest the trust capital for the long term, and enabled the beneficiaries to become trustees of their own trust capital. We worked with the solicitor to draw up an expression of wishes, to guide the additional trustees and executors as to how to treat the trust capital.
- We reviewed the original trust, and appointed new younger trustees to ensure the deed originally drawn would allow greater perpetuity. The investment bond held within the trust was amended to provide income from the trust to the default beneficiaries, as no drawings had ever taken place since inception.
Result
- By using a combination of discretionary trusts created by a deed of variation; suitable trustee investments; revised will provisions, we were able to save the next generation at least £800,000 IHT, thus tying in with the original intention of the settlor/deceased.
- The existing investment bond was also held in a flexible trust, and the clients were advised to retain the capital in the trust, against their original instincts to draw out of the trust and distribute immediately. Instead, the investment was used to generate income, and save on exposing the capital to further IHT and re-investment costs. This saved a further £100,000 by taking into account their existing holdings alongside the inheritance.
- The solicitor we worked with helped to create bespoke trusts for each differing family member and also reviewed and put in place where necessary new wills to cater for their change in circumstances.
- The solicitor worked with our tax consultant and financial consultant to create a deed of variation into a discretionary trust, and save immediately the potential IHT on the estate. This was originally planned by the parents who held the farm assets until death.
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