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Land ownership: charitable land trust

Why form a charitable land trust?

25 November 2011

Unable to depend on traditional succession and burdened by huge expenses, owners of large estates have to fight to keep their heritage intact for future generations. Forming a charitable land trust is one solution, says James Ruddock-Broyd


Charitable land trusts have been formed for centuries for a variety of reasons. Some of the older ones were set up to provide an investment income for charitable purposes, such as education or religion. More recently, particularly during the 1970s and 1980s, charitable trusts were formed to prevent fragmentation of historic estates and ensure they remained a single entity in perpetuity for community and public benefit.

Traditionally, the owner of such an estate was a steward of the land, who used his wealth and influence to the benefit of the local community. But he is becoming an increasingly endangered species who has to fight for his survival. In many cases, the landowner has no direct heirs and the risk of the estate being broken up under the burden of capital taxation is a serious consideration. The liability for capital transfer tax, formerly inheritance tax, is incurred on the transfer of assets, either during an owner’s lifetime or on death. When most charitable land trusts were formed in the 1970s, the tax had a top rate of 95%. Since 1979, the tax rate has been reduced to 40% and recent changes in the law relating to housing and farm tenure exemptions has allowed for the burden of capital transfer tax on landed estates to be considerably eased. So far fewer charitable land trusts are created.

Nevertheless, the planning required to keep an estate in private ownership and maintain its viability for present and future generations is considerable. A charitable trust allows the owner (the ‘settlor’) to exert influence on the future of the estate through the trust deed and set long-term objectives for the property. There might be other charitable objectives, but the primary intention is usually to restore, preserve and maintain the estate property for the public benefit.

Charitable status

Generally, there are two types of land trusts: a family trust and a trust with charitable objects. The former ensures the long-term continuity of family assets, while the latter allows a donor with philanthropic ideals to form a trust for the ‘public benefit’ of a group of people or the public at large.

A charitable land trust involves the irrevocable conveyance of the legal estate in the land to a body of charitable trustees. As long as the Charity Commission’s guidelines on public benefit are met, any land, with or without buildings, may be settled on a charitable land trust, ranging from a vast estate and mansion house to a garden or folly. The Charity Commission’s guidelines relate to the use to which the capital and income is put after settlement.

In order to satisfy the law of charities and the tax laws, the settlor forsakes all the legal and financial benefits of ownership. Hence, rights of occupation and all sporting rights have to be paid for at a full market rent through the agreement of the trustees. In special cases it has proved possible to set up a land trust for a limited period of, say, 99 years, but this is the exception rather than the rule.

While one of the driving forces behind the establishment of land trusts is the burden of tax, another is the need for a structure to hold land in trust for the very long term – something the law relating to private trusts has for centuries sought to prevent. Charitable trusts, being exempt from the rule against ‘perpetuities’, make it possible to ensure a property is maintained intact for the public benefit for successive generations, unaffected by the uncertainties of human mortality or accidents of birth.

Trusts are formalised in the trust deed, which sets out the charitable purposes, the names of the trustees, terms of office, conditions of dismissal and reappointment, and so on. There are usually no fewer than three trustees, and the settlor of the trust (the erstwhile landowner) with his family could be among them. Even if there are other charitable objectives, the primary intention is to restore, preserve and maintain an estate for the public benefit. It was accepted by the courts (in re Verrall [1916]) that the permanent preservation for the benefit of the nation of lands and buildings of beauty or historic interest constituted a valid charitable purpose, provided it was for general benefit and not only for the benefit of the donor family. Thus, preserving the land as an estate is not enough; there has to be some public benefit arising from its scientific or historic interest or outstanding natural beauty.

Case study: West Dean, West Sussex


Figure 1: West Dean’s magnificent manor house, now West Dean College © Edward James Foundation

Edward James inherited the 6,400 acre West Dean estate on the death of his father in 1912. It remained in the control of his trustees until he was 25 in 1932. Edward died in 1984, 20 years after creating his eponymous charitable trust, the Edward James Foundation.

Although latterly he did not live at West Dean, for many years he had wanted to find a way to preserve the family house and estate as an entity, to put it all to some useful purpose and so prevent his estate being broken up upon his death. The creation of a charitable trust secured that continuity of purpose and ownership.

The primary objective of the foundation is education, focused on an internationally renowned range of programmes in the visual and applied arts and practical conservation/restoration at West Dean College. The college is also well known for its continuing education programme of courses in art, craft, music, photography and gardening.

The estate continues to provide resources to help meet the operational costs of running the college and fulfil its educational objectives. Last year, the trustees broadened the foundation’s charitable objectives to include, as a secondary objective, the preservation of the estate to reflect its historical, architectural, environmental and scientific importance. This has the effect of ‘locking’ the estate to the college, creating a mutually beneficial symbiosis that precisely fulfils the founder’s original wishes.

Public benefit

Until recently, the definition of charitable benefit had remained the same since the 16th century: the relief of poverty, the advancement of education, the advancement of religion and other purposes beneficial to the community. After much consultation in the last decade, the Charities Act 2006 was passed, extending the list of purposes to 13 and introducing an overriding requirement for ‘public benefit’. Whereas there had been a presumption that any charitable purpose was for the public benefit, under the current legislation this has to be demonstrated to the satisfaction of the Charity Commissioners.

The purposes most appropriate to land charities are education, community development, promotion of the arts, culture and heritage, the advancement of science and environmental protection or improvement. Preservation and conservation were included as purposes in the draft Bill, and the Charity Commission produced a helpful booklet in February 2001, No. RR9, outlining the conditions under which preservation and conservation organisations could achieve charitable status. However, these purposes were not incorporated in the Act and such organisations have to provide expert evidence to support their ‘public benefit’ credentials.

The Charity Commission instituted ‘review visits’ to ensure charitable trusts were fulfilling their obligations in terms of management and the public benefit, but feedback from those who experienced such visits indicated that commission staff did not always seem to comprehend the nature and operational management of rural estates. However, principally due to the recent severe public sector budget cuts, the review visits have largely ceased and are now confined to situations where serious concerns are raised.

The constitutions of land charities are many and varied, but generally are of two kinds: grant-giving, where the surplus is awarded to individuals and/or other charities, and where the surplus is reinvested in improvements of the functional land and property.

Taxation

A charitable trust qualifies for a number of tax exemptions and reliefs on income and gains and on the profits from some activities. A cardinal rule is that income and gains must be used for charitable purposes only. Subject to that, a charity may reclaim tax on income donated under the Gift Aid scheme and on income (e.g. bank interest) received after deduction of tax, but not dividend tax credits. Most investment income is tax free, including rent and other income from land, but trading income is normally taxable. To avoid paying the latter, many charities set up whollyowned subsidiary trading companies and receive tax-free donations of the company’s profits, which are reduced by the amount donated. Gifts of land and shares from individuals may qualify for income tax relief on the value donated.


Charitable trusts, being exempt from the rule against ‘perpetuities’, make it possible to ensure a property is maintained intact for the public benefit for successive generations

Capital gains made by charities are tax free. A person giving an asset to a charity does not pay capital gains tax, but the charity inherits the base cost to the donor of the asset and could be liable for tax if it disposes of the property later, when it has ceased to be recognised as a charity for tax purposes. Gifts and bequests to charities are not subject to inheritance tax. Importantly, a charitable land trust does not have to pay stamp duty land tax on the purchase of freehold or leasehold land.

A charity charging for the supply of goods and services may be liable to register for and pay VAT, and VAT is usually payable on supplies purchased by a charity, with a number of reliefs. One of the most valuable of these for a land trust is the zero-rating of construction of buildings for non-business charitable use and of certain works to listed buildings. Charities enjoy mandatory relief of 80% on business rates where buildings or premises are occupied for their own management and administration purposes. Some local authorities extend this relief on a discretionary basis so that no rates at all are payable.

Charitable land trusts have been in existence for a long time and many communities, especially rural ones, have benefited from the philanthropic motivation of settlors seeking to maintain historic estates in perpetuity. Since such trusts benefit local people directly, as well as the wider public, they have a valid claim to being perfectly in keeping with the spirit of David Cameron’s ‘big society’.

Case study: Belsay, Northumberland

Figure 2: Medieval Belsay Castle was extended into a mansion in the early 1600s © Angus Thompson

The Belsay Estate Trust was established in 1988 by the owner, Sir Stephen Middleton Bt, after the estate had been owned continuously by the Middletons for more than 800 years. Sir Stephen had no direct heirs and was concerned that the impact of inheritance tax and eventual distribution among the wider family would result in the Belsay Estate being broken up and sold off.

Various options were considered to preserve intact the historic core of Belsay, including heritage land designation and potentially exempt transfers. However, none of these would have secured the future of Belsay as Sir Stephen hoped, so after taking considerable professional advice and with the support of his closest family, he decided to place the core of the estate into a simple charitable trust. This included the Grade 1-listed Belsay Hall and Belsay Castle, gardens and parkland, residential and commercial properties within this area and in Belsay village, and two farms that impinged on the parkland.

The objectives were to restore, preserve and maintain the property, both as an historic setting for the hall and castle and in its own right, for the benefit of the nation. The trust has a guardianship agreement with English Heritage for the management of the hall, gardens and castle, which are open to the public. Much restoration work has been carried out on the parkland, some of which is open to English Heritage visitors and the remainder to groups by appointment. The parkland is let to local farmers for the grazing of cattle and sheep and the houses are let, as far as possible, to local people.

James Ruddock-Broyd is a committee member and former chairman of the LTA. He was assisted by Richard Sowler, a Barrister specialising in tax and finance at Middle Temple Lane Chambers

Further information