John Fitzgerald and Hannah Atkinson detail the numerous tax reliefs the new 25-year-old Duke of Westminster may be employing to protect his family’s £9 billion estate.
The 6th Duke of Westminster, who died on 10 August, was one of Britain’s richest men, with a fortune estimated at £8.3 billion. An estate of this size would usually be faced with an Inheritance Tax (IHT) liability of over £3 billion, in the absence of any IHT planning or reliefs.
Those inheriting substantial landed estates such as this have often been faced with the decision of whether or not to sell vast swathes of the estate to satisfy the usually high upkeep costs and IHT bills, in situations where there may not be sufficient other liquid assets: It is said that death duties were the main reason for the Percy family being forced to sell 47,000 acres of their Northumberland Estate in the 1930s.
As has been much commented on in the media recently, there are several tax planning strategies that have been employed to significantly reduce the IHT liability to prevent break up of a large estate following a death.
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There are numerous exemptions families can employ. One such exemption is ‘death in service’. This was the position taken by the family following the death of the 14th Duke of Westminster, who died in 1979, and whose estate was entirely exempt from inheritance tax. Because they successfully argued that his death (from cancer) was accelerated by a wound he sustained during the Second World War.
That is however an exemption which, perhaps fortunately, is not going to be widely applicable when dealing with large estates. The advisors to the Duke of Westminster and the Grosvenor Estate, and other estates like it, have had to look to other means in order reduce the potentially crippling IHT burden.
Discretionary Trusts
Many families with large estates choose to hold their assets in a series of discretionary trusts. The major benefit of this is that the assets are not part of any individual’s estate and money and assets can remain held in trust (for up to the current perpetuity period of 120 years). Where the trusts are established on a discretionary basis such that no family member has an absolute right to the assets, no liability arises to IHT on the death of a beneficiary.
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Discretionary trusts do attract a tax charge every ten years (up to a maximum of 6 per cent of the value of the chargeable assets in the fund) and a charge also arises when assets are distributed out of the trust, but with careful management, these charges can be accommodated and planned for. Such a structure is often preferable, especially as it provides other benefits such as potential protection against costly divorces or untimely deaths. The Blenheim Estate and Blenheim Palace, the seat of the Dukes of Marlborough, is reportedly protected in this way and has allowed the trustees the power to use their discretion as to who should occupy the Palace.
In addition to the use of discretionary trusts, there are several exemptions which can reduce the tax burden further. The most common exemptions available to landed estates (such as the Grosvenor Estate) are Agricultural Property Relief and Heritage Relief.
Agricultural Relief
As a landed estate by its very nature contains land, it is common for owners to seek Agricultural Property Relief from IHT on qualifying assets. In order to obtain this relief successfully, the land must be used for pasture or be used for agriculture. This relief may also be available for cottages and farmhouses which are attached to the agricultural land. The rate of relief can be up to 100 per cent of the value of the asset and it would not be at all surprising if this relief is factored into any planning that the new Duke of Westminster and his trustees may undertake, or indeed may rely on to reduce the IHT bill on his father’s estate. The Grosvenor Estate has food-producing farms and rural estates which attract this relief.
Heritage Relief
Heritage relief is an IHT relief that is available to any estate fortunate enough to hold property that is of outstanding historic or architectural interest.
Examples of families who have opened their homes to the public as a way of earning income to repair crumbling family seats and reduce their IHT burden, are the Canarvon Family who opened Highclere (of Downton Abbey fame) and the Percy family who opened Alnwick Castle (recognisable as Hogwarts Castle in Harry Potter).
In these cases, the houses are open to the public and part of a tourism business, and as such are exempt from IHT.
In order to receive this relief, the families undertake to preserve and restore the buildings and important chattels. This is often a heavy burden as restoration costs can sometimes run into the millions. In 2009, urgent repairs needed at Highclere Castle were estimated to cost £1.8 million and the costs of restoring the entire Canarvon Estate were estimated at £12 million.
Business Property Relief
Another option available to reduce the IHT liability for large estates is to claim Business Property Relief on business assets. The Grosvenor Estate holds its assets in several businesses such as a property business (Grosvenor Group Limited) owned by trustees, and a food-production and energy business (Wheatsheaf). It is possible to obtain up to 100 per cent IHT relief on business assets such as those held by the Grosvenor Estate, dependent on how the business is structured and how the assets are ultimately owned.
It is therefore possible, with creative estate management, to reduce significantly the value of the chargeable estate for IHT. Without these reliefs, many who inherit a large estate would find it impossible to keep it in the family.
John Fitzgerald is a solicitor and Hannah Atkinson is a trainee at Gordon Dadds
