The Use of Trusts Continue to Decline

Changes to the UK tax regime in recent years, and possibly the use of scare tactics by the government have contributed to the decline in people using trusts, even though trusts can help towards a secure financial environment for the future of your family.

Figures published by HMRC showed that the number of trusts required to declare their income declined by almost one-fifth between 2008-09 and 2012-13, the most recent for which data are available. The tax paid by trusts fell below £1bn.

One of the most significant factors in the decline of trust use is probably down to the introduction of a transferable nil-rate inheritance tax band in 2007. This change effectively increased the nil-rate band for a married couple to £650,000.

The introduction of the transferable nil-rate band, means any unused IHT threshold from a deceased spouse can be used by their remaining partner when they die. This effectively takes many estates valued at up to £650,000 out of the IHT bracket.

Tina Riches, national tax partner at accountants Smith & Williamson said: “It was fairly common for well-off people to set up discretionary will trusts where the spouse might have needed the assets. When the transferable band was introduced, it did away with the need to do this in many cases.”

Another reason for the decline of trusts was the rise of CGT rates in 2010, which put hundreds of thousands of trusts at risk, particularly family trusts set up for young children.

The applicable rate of capital gains tax — which is payable on the increase in value of assets that are taken out or put into a trust, increased from 18 per cent to 28 per cent.

The rate of tax levied on trust income — which accounts for the majority of trust tax revenues — also increased in 2010-11 from 40 per cent to 50 per cent. The rate payable on UK dividend income rose to 42.5 per cent. These rates were both lowered by five percentage points in 2013-14.

Andrew Hubbard, tax partner at Baker Tilly, said that these tax increases were part of a long-term trend that has eroded the tax advantages of using trusts for wealth planning.

“It is quite rare nowadays for trusts to be set up purely with a tax motive . . . The tax regime is essentially now tax-neutral.”

In December, the UK government decided not to pursue plans for a so-called “settlement nil-rate band”, where each taxpayer would have a lifetime allowance for tax-free transfers into trusts.

There is an exemption for trusts that can take advantage of the 10 per cent Entrepreneurs relief rate on CGT, but there are rumours of this being changed.

All these factors coupled with the constant scaremongering by the government about tax avoidance, have led to a decline in the use of trusts and less public faith in them.

The truth is, is that trusts are still the best way to provide a protective tax regime for your family. In fact, estate planning can be an important and integral part of your family’s future.

Stephen Pallister, trusts partner at Wiggin Osborne Fullerlove and a member of the tax committee for the Law Society, says:

“The government is too focused on trusts as vehicles for tax avoidance. We would like to see them thinking about the benefits that trusts bring to families.”

Stephen Herring, senior tax partner at accountancy firm BDO, says: “Over the years, governments all seem to have taken a very negative position on trusts and appear to think they are some kind of tax scam but many people use them as a way of controlling assets for their children.”