The decline of trusts
The number of trusts filing self-assessment tax returns for 2021/22 was 37% lower than for 2003/04. The decline comes as no real surprise given the eroding advantages of using a trust and the recent requirement to register trusts with HMRC.
Interest in possession trusts
Interest in possession trusts have seen the sharpest decline since 2003/04, with their number falling from over 100,000 down to just 44,000.
- HMRC figures show that the decline in interest in possession trusts is mainly at the lower end of the scale where trust income is less than £10,000.
- The inheritance tax (IHT) regime for interest in possession trusts from 2006 removed much of their favourable tax treatment. Such trusts are now subject to IHT on a similar basis to discretionary trusts, so, for example, a 20% tax charge can arise on a lifetime gift into an interest in possession trust.
However, interest in possession trusts are still commonly used in wills. Typically, a spouse or partner will be given rights during their lifetime (such as being able to stay in a marital home), with the capital subsequently passing to children – which is particularly important if there are children from a previous relationship. Such arrangements still enjoy a favourable IHT treatment.
Trusts are more than ever becoming a specialist method of tax planning, and this trend is only likely to increase over the coming years.
Trust planning is still popular for those with a high net worth. Trusts allow wealth to be passed down the generations, protecting against marital breakdown, bankruptcy and family disputes.
There are reports that a future Labour Government would scrap business relief and agricultural property relief, and such a move would further limit the use of trusts. Trusts holding assets currently qualifying for relief could find themselves facing periodic IHT charges.
HMRC’s latest information on trusts for October 2023 can be found here.