Landing gear

The recent news that the Welsh Llanfendigaid estate, believed to have remained in the same family since 1241, has been put up for sale, highlights the need for those owning landed estates to carefully consider funding options. Those inheriting landed estates will often be faced with dilemmas involving both financial and emotional complexity, and are likely to require advice from their practitioner.

Varying the inheritance

When inheriting a landed estate, clients ought to first consider whether there is another person in the family who would be better suited to owning or managing it. It may be that circumstances have changed since the will or trust deed was drawn up. Whether the inheritance is via a will, trust or an intestacy, it is usually possible to divert inheritances to other family members. Further, if done via a will within two years of death and certain formalities are followed, the tax impact of doing so could be neutral for inheritance tax (IHT) and capital gains tax (CGT) purposes. Income tax for the period between the death and diversion will generally be chargeable on the original beneficiary. Trust deeds, by contrast, may also provide a certain amount of flexibility.

Lifetime gift

From two years after death, one option to consider is a lifetime gift of a landed estate to the next generation. An advantage of lifetime giving is that there is no IHT, provided the donor survives seven years, and a generation is skipped for the purposes of the charge on death. If a relief applies, such as agricultural property relief (APR) or business property relief (BPR), the need to wait seven years may fall away. Indeed, many families are currently considering gifts in the event that these reliefs are repealed. A drawback of gifting is that it triggers CGT if the estate is standing at a gain, but deferrals may apply where business assets are concerned. Outright gifts also lack any asset protection from third-party claims from creditors or divorcing spouses, whereas assets in trust have some (but not full) protection.

Long-term tax planning

The long-term tax status of the estate must be considered particularly carefully. Woodland, arable land and land used for grazing are often subject to APR. Crucially, the land must be owned for at least two years before death if the owner occupies the land or seven years if the owner does not occupy. This relief is limited to the ‘agricultural value’; namely, the value if the land were subject to a covenant limiting its use for agricultural purposes for eternity. The remainder of the value (the ‘hope’ or ‘development’ value) may be chargeable to IHT, or may benefit from BPR.

Diversification

Diversification has been the recent trend for paying for the upkeep of estates. Ventures range from event venues to furnished holiday lettings (as in the case of the Llanfendigaid estate). Driving this were sector-wide challenges affecting agricultural including, most recently, a potential reduction in farming workers from the EU due to Brexit. Since then, the pandemic has not only hit events-focused estates extremely hard (often calling into question the current family's continued ownership) but has also added another variable for profit forecasting. Industry bodies have pointed to drops in demand from restaurants amid restrictions and, possibly, vegan trends leading to a fall in meat prices; however, demand for crops has generally remained robust and farms supplying supermarkets will have fared well.

Selling

Careful consideration of the financial outlook or the time and cost involved in maintaining an estate may mean that a sale is the only appropriate outcome. Such a decision will be difficult where an estate has become intertwined with family history, but can provide much-needed liquidity, overall simplicity and, quite frankly, relief. Practitioners should advise as to the potential CGT liability and recommend cataloguing capital costs incurred throughout ownership, as this can mitigate tax due. A consideration of the stamp duty and land tax position for the buyer may inform negotiations if it is known that the buyer will be able to apply non-residential rates or multiple dwellings relief.

The best-laid plans for an estate involve an honest appraisal of a client’s personal and financial factors. Practitioners must be sensitive to both elements and be prepared to assist clients in meeting their wider objectives.