Strategic Planning for Modern Landed Estates

This is the second of our series of articles exploring themes around succession planning for Landed Estates. This article provides further detail on key ownership structures for owning and operating an Estate to maximise available tax reliefs.

How to achieve succession

Succession is achieved by planning, usually long-term, who is to succeed, when is that succession to take place, and how is that succession to be effected. 

Who is to succeed is invariably a personal matter and extremely fact-specific. It may be obvious or it may require identifying a successor from a pool of potential candidates.

When the succession is to take place will be either on the death of the current owner or beneficiary of the estate or during the lifetime of such an individual, perhaps when he or she wishes to step back from full-time involvement in the Estate and when a successor has been identified.  Managing a lifetime succession itself can involve long term planning of its own.

How the succession is to take place is often dictated by taxation.  In fact, taxation will also be one of the major considerations affecting when the succession is to take place. Principally, we are dealing with Inheritance Tax (IHT) but also, where there is a lifetime succession, Capital Gains Tax (CGT).  In this context, landed estates will be looking principally at IHT’s Agricultural Property Relief (APR) and/or Business Property Relief (BPR). If these are available, it should be possible to effect the succession without an onerous tax burden, or at least without one that of itself may force an unwelcome and untimely sale of estate property. Accordingly, in order to try to enable one or other or both of such IHT reliefs to be taken advantage of, landed estates are often held through or in a structure owned or undertaken by the owning entity (be that an individual or trustees, for example). 

Companies

A company is a legal entity separate from its constituent members (shareholders) and directors. It can, in theory, continue indefinitely, and it is limited in its liability to the value of its assets. In exchange for this limited liability, public access to the company’s accounts and directors is made via Companies House.

Sometimes an entire landed estate is held within such a private company, so at some stage the estate will have been transferred to that company’s ownership. Such structures were more commonly set up when the rates of corporate taxation were lower than (often very high) personal taxation. The shares may be owned by an individual, or a number of individuals or trustees of a trust holding the shares in the company on behalf of the beneficiaries of the trust. The directors will often, but not always, be the shareholders. 

Because of the limited liability afforded by a company structure, trading entities on an estate are sometimes held within a company, particularly where there are employees and / or exposure to third parties such as the public. Broadly, trading companies attract BPR at 100%. Accordingly, the directors of the company will try to ensure that the company is, overall, a trading company. While the company may also involve an element of investment activity (such as the letting of residential property), in order to attract BPR the directors of the company need to ensure that the investment element of the company’s undertaking does not predominate over its trading activities.

Partnerships

A partnership comprises two or more individuals or two or more entities, such as individuals and bodies of trustees or companies. Typically, in the context of a landed estate, a partnership might comprise individuals and trustees. Farming undertakings by families within the context of landed estates are very often conducted by way of a partnership. 

A partnership is not a corporate body and (in England and Wales) is not a legal entity separate from its constituent members. Although it therefore cannot exist indefinitely, partnerships can endure and evolve over time, with partners joining and retiring as time goes on. 

A partnership is a very useful, and flexible, vehicle for bringing together and rewarding the expertise, the time and the assets of various parties working together with a common purpose. While, technically, a partnership can exist without formal documentation, it is always preferable for a partnership to be documented in writing so as to help evidence its existence and to reduce the scope for the parties to disagree (and, should they disagree, how to deal with that). 

As with a company, an interest in a partnership can attract BPR where the undertaking of the partnership is wholly or mainly a trading undertaking, ie where the trading aspects of the partnership predominates over the investment aspects.

Limited Liability Partnerships (LLP’s)

An LLP is a corporate body but is not a company. LLP’s were designed principally for industries such as professional service industries which traditionally operated as a partnership but, over time, wished to take advantage of the limited liability aspects of a corporate body. Accordingly, while they are occasionally seen in the context of landed estates, they are comparatively rare and the ordinary partnership or company structure for holding a landed estate, as set out above, favoured. 

Balfour

“Balfour planning” in the context of a landed estate, named after the 2010 case of HMRC v Brander involving the late Earl of Balfour’s estate, is a means of succession planning aimed at taking advantage of one or other of the holding structures set out above, together with capturing BPR, with a view to passing on a landed estate free of, or largely free of, IHT. Furthermore, and importantly, it also allows for a proportion of an estate’s investment assets, which would otherwise be liable to IHT, to pass free of IHT by being bound up within that holding structure.

Essentially, where a landed estate is held within a company or on the balance sheet of a partnership, with the trading activities of that entity predominating over investment activities, BPR can be obtained, as has been outlined above. To ensure that the correct trading vs. investment balance is achieved, Balfour planning looks at four key elements of that entity’s finances, namely capital value employed (ie often the acreage employed), turnover, profit, and time spent of the entity’s various activities. Then, for each of those elements, the planning looks at the proportion of that element that relates to or derives from the entity’s trading activities, and the proportion that relate to its investment activities.  An overall “in the round” view is then taken as to which predominates: trading or investment? 

Where the investment aspects predominate, or are at a level where they might predominate, some of these investment aspects can then be stripped out and held in a separate entity on which it is accepted BPR will not apply (the IHT spouse exemption and / or life insurance might come into play here to mitigate that resulting IHT exposure). As a result, the predominately trading entity, albeit one that might also include some element of investment activity, will attract BPR.  By these means, therefore, the benefit of BPR can be extended to assets that would not ordinarily attract that relief. Furthermore, the operation of these non-trading activities can be integrated with the operation of the trading activities under the umbrella of the single identified trading entity, be that a company or partnership. 

Conclusion

Naturally, each estate is individual and fact specific, so proper professional advice obtained at the appropriate time. However, with proper advice and analysis the correct entity for holding a landed estate or, indeed, a particular part of a landed estate, can be identified with a view (i) to mitigating the IHT paid on a succession event such as a death or a lifetime transfer, (ii) to provide a useful vehicle for the operation of the estate going forward, and (iii) succession planning for the estate: in summary, this is what strategic planning for a modern landed estate involves.