High Court Backs Rectification of Potentially Disastrous Trust Creation

Few businesses have the emotional ties that characterise a family farming business and it is no wonder therefore that families often take considerable steps to prevent a family farm from being broken up.

When a father and son who farmed in partnership undertook arrangements to protect the family farm from possible claims from other (non-farming) family members and the possibility of a claim on marriage break-up, they intended to make sure that the business could be passed down intact to succeeding generations. In 2011, a trust was created to give this protection to the farming assets.

However, due to a lack of understanding of Inheritance Tax (IHT) law, what they actually succeeded in doing was to create an IHT liability on the transfers into trust of some £200,000 (including interest and penalties).

Luckily, HM Revenue and Customs did not oppose the application by the family to have the whole arrangement set aside, but it took an appearance before a High Court judge to have the creation of the trust rescinded.

In order to achieve this, it was necessary to show that the transfers into trust were a mistake and that it would be unconscionable for the error not to be rectified.

The upshot is that although the original 'crushing' IHT liability has been avoided, various other tax issues – of lesser significance – will emerge as the ownership by the trust will now be replaced with continued ownership by the original owner(s) for all tax years from 2011 onwards.