Wealthy families are increasingly shunning the use of trusts for financial planning because of increased tax rates and concerns about privacy, advisers warn.
The latest statistics from HM Revenue & Customs, published on Thursday, show the number of trusts has fallen for the third year in a row. In 2016-17 there were 156,500 trusts, down from 163,500 in 2015-16 and 167,000 in 2014-15.
Meanwhile, the total income reported in respect of trusts and estates also fell, down £500m or 17 per cent to £2.4bn in 2016-17.
Rachael Griffin, tax and financial planning expert at Quilter, said trusts were suffering from an “image problem”. “There is a perception in some quarters that they represent an attempt to disguise assets from the tax authorities and that has been propagated by some of the high-profile tax abuses publicised in recent years. These are totally unrelated incidents and should not discourage legitimate use of trusts, yet it appears they are being tarred with the same brush.”
Since the government’s introduction of an online register of trusts in 2017, some individuals are also more concerned about privacy. Ms Griffin said: “People may be dissuaded from using a trust because they’re concerned Big Brother could be using it to peer into their private affairs.”
Other advisers said the attractiveness of trusts as a wealth planning tool had diminished in recent years.
“The Labour government applied a sledgehammer to the inheritance treatment of trusts in 2006 and this has continued to have a very significant impact on the creation of trusts,” said Allan Holmes, a partner at Saffery Champness.
“Where in the past parents and grandparents could gift wealth to their children and grandchildren under the protection of a trust — for often extremely valid non-tax reasons — their ability to do so has been severely curtailed. Trusts that are created tend to be for relatively low amounts up to £325,000 — or £650,000 in the case of couples — and the administrative burden can be quite high,” he said.
A trust’s income and gains are also now taxed at the highest rates, added Kay Ingram, chartered financial planner at LEBC.
The regulatory treatment of trusts may be subject to more change soon. The government is consulting on how the trusts regime can be reformed to be simpler, fairer and more transparent.
Nevertheless, there may beinheritance tax(IHT) benefits to using trusts, advisers said. Although trusts are subject to tax, holding wealth within a trust separates it from an individual’s personal estate. This means assets within a trust are not liable to 40 per cent inheritance tax. Holding some assets in trusts may also be helpful for wealthy families faced withrising probate fees, Ms Ingram said.
“Assets in trust can be distributed without probate, so not only do they give families access to funds while probate is applied for — a process which can often take months to complete — [but] life policies designed to fund funeral and IHT bills and to pay off debts [can] be placed in trust to facilitate quick payment and escape IHT and probate fees.”
The government’s consultation on trusts ends on February 28.
Agyemang, Emma.FT.com; London (Feb 15, 2019).