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Tony Mudd: Are trusts still relevant?

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Are trusts still relevant? Many would have us believe not. True they took a big knock in 2006 with the introduction of a Finance Act that substantially changed the taxation position of trusts.

In one ‘act’ the popular and tax-advantaged accumulation and maintenance trust was no longer available, the concept of relevant property trusts was extended and the vast majority of lifetime trusts became chargeable transfers for inheritance tax.

Rather than sitting back and admiring the resultant chaos, the Chancellor followed this in 2007 with the introduction of the transferable nil-rate band between spouses and registered civil partners, meaning, in the view of some, nil-rate band discretionary will trusts were no longer appropriate.

Time spent with Enterprise Investment Scheme or business property relief investment providers will invariably find them banging on about the benefits and flexibility of BPR; the two-year timeframe, the replacement rules and that they can be used with attorneys and so on.

I cannot deny that these products have their place and provide a valuable financial planning option. But the reality is that any such protestations, along with the 2006 and 2007 Finance Act changes, could only be used to argue that trusts have passed their ‘best before date’ were their sole use that of inheritance tax planning.

This is of course very far from the truth, as there are a host of reasons why a trust may be attractive, advisable and relevant. These include:

  • Protection of beneficiaries. While it may be part of an individual’s IHT planning, a trust is the only way to establish the gift and protect the recipients.
  • Uncertainty as to the identity of a beneficiary. At the time that the gift is made, the donor may not know exactly who he or she wishes to receive the gift –allowing the donor to change his or her mind or add unforeseen future individuals.
  • Capital gains tax planning. An outright gift to an individual can trigger a charge to CGT for the donor with no sales proceeds with which to pay. By comparison, if the same gift is made to the relevant property trust, the capital can be ‘held over’.
  • Protection of trust assets. Trusts can protect their assets from dissipation in meeting claims by third parties in situations such as divorce or financial problems.

So, are trusts still relevant?

Absolutely. They have had and will continue to have a significant role to play in estate planning and other purposes.

Modern trusts can now be drafted to ensure maximum flexibility.

Are trusts a panacea? No, and they never have been; neither is the plethora of tax-advantaged investment vehicles that have been touted as threatening their demise.

Tony Mudd is divisional director of tax and technical support at St James’s Place 

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There is one comment at the moment, we would love to hear your opinion too.

  1. I wholeheartedly agree that trust planning still has major benefits for investors. What we’ve seen is that despite all the tangible attractions of trusts, people have become very reluctant to use them because settlements utliise the nil rate band and cause a 20% charge at the higher end. Using BPR in conjunction with trusts can provide significant benefits, because the advantages of trust planning can be accessed without using the nil rate band or incurring chargeable lfetime transfer tax. And once BPR assets are settled, investors have a much wider range of investments options available to them should they wish.

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