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Advanced Taxation - Estate Planning and TrustsInheritance TaxAgricultural Property ReliefBusiness Property ReliefCapital Gains Tax

ACCA · Question 02 · Advanced Taxation - Estate Planning and Trusts

SECTION B: ADVISORY REPORT

This question is worth 25 marks.

You are a tax advisor preparing a report for Mrs. Thorne, aged 72, who owns 'Oakwood Farms', a large agricultural estate in the UK. She has operated the farm as a sole trader for 25 years.

Mrs. Thorne wishes to retire and transfer the entire farming business, including the farmhouse, agricultural land, and farm machinery, into a discretionary trust for the benefit of her three grandchildren. The transfer is scheduled for 1 May 2027.

The current market values are:

  • Farmhouse (occupied by Mrs. Thorne for farming purposes): £850,000
  • Agricultural land: £1,200,000
  • Farm machinery: £300,000

Mrs. Thorne will move out of the farmhouse into a smaller town property and will not retain any benefit from the trust. She has made no previous lifetime gifts.

REQUIREMENTS:
Prepare a report for Mrs. Thorne advising on:

(a) The Inheritance Tax (IHT) implications of the transfer to the discretionary trust, specifically calculating the lifetime IHT payable (if any). You must explain the availability and application of Agricultural Property Relief (APR) and Business Property Relief (BPR) on the specific assets. (12 marks)

(b) The Capital Gains Tax (CGT) implications of the transfer, explaining how gift hold-over relief can be utilized to defer the CGT liability, and the interaction between this relief and the IHT treatment. (8 marks)

(c) The ongoing Income Tax treatment of the discretionary trust, including the rates of tax applicable to trust income and how distributions to the grandchildren will be taxed. (5 marks)

How to approach this question

Structure the report clearly addressing IHT, CGT, and Income Tax in turn. For IHT, identify the transfer as a CLT and apply APR/BPR to the specific assets to show the tax drops to nil. For CGT, explain the deemed market value rule and how s.260 relief applies specifically because it is a CLT. For Income Tax, state the high trust rates and the mechanism of the tax credit for beneficiaries.

Full Answer

Transfers to discretionary trusts are Chargeable Lifetime Transfers (CLTs). However, agricultural and business assets benefit from 100% APR and BPR, often reducing the IHT to nil. Because the transfer is a CLT (regardless of the tax actually paid), s.260 hold-over relief is available to defer the CGT. Discretionary trusts pay tax at the highest rates (45%), but beneficiaries can reclaim this if they are subject to lower tax rates.

Common mistakes

Students often incorrectly apply BPR to the land instead of APR. APR must be considered first. Another common mistake is assuming s.165 (business asset hold-over relief) must be used; while possible, s.260 is preferable and automatically takes precedence when the transfer is a CLT.
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