The decline of trusts is inevitable from a political standpoint, but we must also remember their service in protecting many generations of Britain’s wealth, writes Mike Hodges
Statistics released by HMRC this week show a fourth consecutive year of decline in the number of trusts in the UK. This is the continuation of a trend which over the last dozen or so years has seen the total number of trusts in the UK fall by not far short of a third from a figure of 220,000 to below 150,000 at the end of the 2017-18 tax year.
Given the significant inheritance tax changes dating back to 2006, this long-term trend will not come as much of a surprise to those who advise in this area. The fact that the popularity of trusts continues to decline more than a decade after these changes is perhaps more of a concern, but reflects the weight of both an increased tax burden and a host of more onerous regulatory requirements.
Despite this decline in numbers, HMRC’s figures show that the total tax take from trusts during the year was £1.32 billion, meaning that they still provide a sizeable contribution to the Exchequer each year.
Within this figure, there is a huge disparity between the largest and smallest trusts. Fewer than 5 per cent of all trusts provide over 50 per cent of the tax, whereas at the smaller end of the scale a third of trusts had income of less than £1,000 each. It is this lower end that is feeling the pinch the most.
The tax benefits of UK trusts have been gradually eroded over recent years, with many prospective settlors turning to alternatives. This erosion has occurred at a time when the tax rates for limited companies have grown ever more favourable, attracting people towards Family Investment Companies. This does not necessarily spell the end of the trust since in many cases it will be advisable to include the trustees of a family trust as one of the shareholders in a FIC trust, as this can provide an extra layer of control and flexibility amongst the members of the family who hold an interest in the company.
Before we prematurely write an obituary for the trust, it is worth remembering that they have existed for hundreds of years. Their current decline does not reflect the fundamental soundness of trusts as a method of protecting inter-generational wealth. Indeed, the non-tax advantages of trusts remain unaltered, and in this time of market volatility, they can still be a lifeboat of continuity and security in succession planning.
It is also worth reflecting for a moment that changes in the UK shown in these latest statistics are not necessarily an indicator of global trends, where the use of trusts for legitimate wealth planning and for the control of assets is still a well-recognised element of the planner’s armoury, irrespective of tax concerns.
Looking to the future, it is concerning that, in this country at least, trusts seem to have become something of a political football. This is despite HMRC’s own acknowledgment that trusts have a number of valid uses (such as when a person is too young to own assets themselves, or is incapable of doing so). However, in the view of many politicians and certain sectors of the population, 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. With the next election approaching fast, we will have to wait to see what the politicians have in store for the centuries old trust.
Photo credit: dronepicr @Flickr
Mike Hodges is a partner at Saffery Champness