personal finance

Wealthy families continue to ditch trusts


Fewer families are using trusts to plan their finances, due to what wealth advisers have described as a “toxic combination” of factors.

The latest statistics from HM Revenue & Customs show the number of trusts fell for the fourth year in a row. There were 149,000 trusts which submitted a tax return in 2017-18, down from 159,000 in 2016-17 — a 6 per cent drop. The number has been in steady decline since 2013-14, when there were 171,500.

Why are trusts less popular?
Their advantages have been eroded over time, particularly since 2006 when the then chancellor Gordon Brown announced reforms to stop trusts “being used to shelter wealth from inheritance tax”. The reforms meant that most assets moved into trusts after this date became subject to an immediate 20 per cent inheritance tax charge and an additional charge of 6 per cent every 10 years. A further charge of up to 6 per cent is levied when assets are transferred out of the trust.

The introduction of an online register of trusts in 2017 has also made some families more reluctant to use trusts due to worries about privacy.

Mike Hodges, partner at accountancy firm Saffery Champness, said: “A punitive tax regime and a host of draconian regulatory requirements [has created] a toxic combination which has compelled increasing numbers of people towards alternative options for asset protection.”

What are trusts used for?
Trusts allow assets to be held by trustees on behalf of beneficiaries. They have been used in Britain since the Middle Ages, when knights departing for the crusades created them to protect their interests and look after their wives and children.

Among the different types, the most straightforward is the so-called “bare trust”, which holds assets in the name of a trustee, often on behalf of children. Once the beneficiary reaches adulthood, they have the right to all the capital and income of the trust. Another type is “interest in possession trusts”, in which the trustee must pass on all trust income to the beneficiary as it arises. “Discretionary trusts” offer more flexibility than other types. Depending on the trust deed, they can decide what gets paid out, which beneficiaries are paid and how often payments are made.

Sean McCann, chartered financial planner at NFU Mutual, said: “Many believe that trusts are only for the very wealthy. The reality is they can be very simple and help resolve a number of common financial problems. Protecting life insurance payouts from inheritance tax, providing income for a surviving spouse while making sure your assets end up with your children or making provision for vulnerable relatives are just some of the areas where trusts can help.’’

Could trusts be subject to more change?
Yes. A recent review into inheritance tax carried out by the Office of Tax Simplification identified trusts as an area of complexity and suggested the government address this in a review of trusts currently under way at HMRC. This is aimed at making trusts “simpler, fairer and more transparent” and ensuring they “cannot be used to hide the beneficial ownership of funds or assets”.

“Trusts [have] become something of a political football,” Mr Hodges said. “In the public mind, and it seems also in the view of many politicians, trusts are inextricably linked with tax avoidance. As a result, they are seen as fair game for further rule changes.

“Both major parties in the last general election pledged different reform measures aimed at improving transparency and with such measures inevitably comes greater uncertainty over the future of trusts and an increased reluctance for people to use them.”



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