For over three decades, Tees has provided expert legal services to multiple generations of the Miller* family, a prominent agricultural family with extensive farming, land and property interests located across several English counties.
Our Partner and specialist in rural succession and estate planning, Catherine Mowat, has worked closely with the Millers for many years, helping them capitalise on opportunities for efficient estate planning and take advantage of valuable Inheritance Tax reliefs.
Alongside Catherine’s team, our Commercial Property, Residential Property, Commercial and Wealth Management teams have worked together collaboratively in order to help the Miller family effectively manage their business and property interests.
Passing assets on to the next generation
Catherine has worked extensively with the Millers over a number of years to put in place comprehensive arrangements that will enable more senior family members to pass on their assets effectively to future generations, whilst minimising the Inheritance Tax (IHT) payable on their estate.
The family were advised to make substantial lifetime gifts to their children and grandchildren, enabling assets to be passed on to younger generations in a controlled way.
How does Inheritance Tax (IHT) work?
IHT is a tax on the capital value of assets (including money, property and possessions) either when somebody has died or on some gifts made during lifetime. On death, it is generally payable at a rate of 40% on all assets over the value of £325,000, although there are exemptions and reliefs that can be used to lessen the amount due. Another way of reducing the IHT payable on your estate is to make lifetime gifts. If you make gifts more than seven years before you die, there will usually be no IHT due on these gifts on your death. If tax does arise, only gifts given less than three years before you die attract the full 40% IHT rate, making lifetime gifts an excellent opportunity for passing on assets to minimise tax.
These lifetime gifts also caused the estate value belonging to the children to rise, increasing their IHT liability. Here, our Wealth team stepped in to help set up suitable life insurance arrangements, written in trust to minimise the impact of a significant tax bill.
Why should I write my life insurance policy in trust?
Writing your life insurance in trust is a way to avoid paying IHT on the eventual payout. When you place an asset into a trust, you essentially give up ownership of that asset to the trust and appoint trustees to oversee it (this can be a solicitor, like Catherine, or somebody else). As the assets (in this case, the life insurance policy) don’t officially belong to you, they aren’t classed as being part of your estate and are therefore not subject to IHT.
Catherine has also worked with the Millers to draft essential estate planning documents such as Wills and Powers of Attorney, and acts as a trustee for the various trusts within which the family’s business and property assets are held. Her many years spent advising this family have enabled her to build a strong relationship with the Millers, bound by mutual trust and respect.
Taking advantage of Inheritance Tax (IHT) relief
Over the years, our Wills, Trusts and Probate team has worked closely with the Millers to ensure their entitlement to valuable IHT reliefs. For example, Catherine’s advice has enabled the family to take full advantage of Agricultural Property Relief (APR) on their eligible assets.
What is Agricultural Property Relief (APR)?
APR allows farming families to pass on agricultural property at a reduced or 0% rate of IHT, either during a person’s lifetime or in their Will. To apply for APR, the land or property must have been owned for at least seven years, or occupied for two years and must be used for growing crops or rearing animals, or take the form of farm buildings, cottages or houses. It does not apply to farm equipment or machinery, derelict buildings, harvested crops or livestock. APR can be due at 100% or 50%, depending on the circumstances.
Catherine also regularly reviews the balance of the Millers’ business activities to ensure that no entitlement to Business Relief (BR) is lost, by using the ‘Balfour’ test.
What is Business Relief (BR)?
BR allows business owners to pass on certain business assets at a reduced or 0% rate of IHT, either while they are still alive or via their Will. The owner must have owned the assets for at least two years before they died for them to be eligible. BR is due at 100% for:
- A business, or interest in one
- Shares in an unlisted company
It is due at 50% for:
- Shares controlling over 50% of the voting rights in a listed company
- Land, buildings or machinery owned by the deceased and used in a business in which they were a partner or controlled
- Land, buildings or machinery used in the business and held in a trust the business has the right to benefit from
To be eligible for BR, a business must also be classed as a predominantly trading business. However, many farms are becoming increasingly diversified, with activities such as cottage rentals and holiday lets shifting the balance from trading to investment.
Catherine used the Balfour test to assess the Millers’ farming business and used the results to advise the family on achieving the best balance between trading versus investment activities within the farming partnership for BR purposes.
Strategic land and property solutions
Our Commercial Property team regularly steps in to assist the Miller family in matters relating to the lease or sale of land and properties, which include a range of sites with commercially let units, and other strategic deals such as granting options. Rural specialists within our Commercial Property team will negotiate and facilitate these various land transactions.
An example of the type of planning advice we offer might be in relation to land owned by a family trust on which planning permission has been obtained for development. In this situation our Corporate team would step in to advise on the incorporation of a ‘freezer’ company.
The team would also prepare bespoke articles of association, ‘freezing’ the value of certain interests in the company in order to cap ownership. This ensures that the growth and value of the land will be passed on to the next generation tax-efficiently and limit their IHT liability.
What is a ‘freezer’ company?
Also known as a family investment company (FIC), a ‘freezer’ company is essentially a private limited company whose shareholders are all family members. Commercial solicitors can help the family prepare bespoke articles of association that set out the rights and interests each party holds within the company. For example, the parents can set themselves up as voting shareholders – thus maintaining control over the company – but ‘freeze’ the value of their interests in the company to cap their ownership.
Meanwhile, the children can be non-voting shareholders but own the majority of the shares, allowing the growth and value to pass on tax-efficiently to the next generation. This makes ‘freezer’ companies an ideal vehicle for intergenerational wealth management, allowing assets to be passed on during your lifetime whilst still retaining control of them. If you live for more than seven years after setting up the company, no IHT will be due (according to the rules of lifetime gifting).
A full- service firm rural families can depend on
For over a century, Tees has been a trusted partner to farming families like the Millers, helping them pass the family business from generation to generation. In this time, our agricultural specialists have developed a unique understanding of the challenges facing the rural community.
From tailored business advice to passing your land and assets tax-efficiently to the next generation, our specialist agricultural lawyers can help you navigate the complex relationship between business, land and family interests.
For further advice, please call us.
*Please note that the family’s name has been changed for anonymity.