View more on these topics

Tony Wickenden: How HMRC rules have led to a decline in trusts

Tony Wickenden 700x450

To say trusts can be extremely useful in estate and tax planning is an understatement. They deliver a legitimate means to make a gift “with strings attached”, which can help to overcome the understandable misgivings some would-be donors have about making outright gifts.

Done properly they can ensure the assets transferred into trust will be excluded from the taxable estate of the settlor, and income and any capital gains generated will be taxed on the trustees.

Over the years, however, HM Revenue & Customs has imposed rules that set clear conditions for a gift being effective for inheritance tax purposes (the gift with reservation and pre-owned assets tax rules) and made the income tax and CGT element less inviting for discretionary trusts.

Aside from the anti-avoidance provisions attributing trust income and gains to a settlor in an increased number of circumstances, income under discretionary trusts (other than the first £1,000 falling within the standard rate tax band) will be taxed at 38.1 per cent for dividend income (with no  dividend income allowance available) and 45 per cent for all other income.

Broadly speaking, trustees only qualify for half of the CGT annual exempt amount and all realised gains above this will be taxed at the highest 20 per cent rate (28 per cent on residential property gains).

Against this background, HMRC’s annual trust statistics, published in January, reported the number of UK family trusts and estates required to complete a full self-assessment return has fallen to 163,000 in 2014/15 from 170,500 in 2013/14. There has been a 27 per cent decline in family trusts reporting under self-assessment in the last decade.

Not particularly friendly

So what is the reason for this? Have some trusts been wound up? Probably. It is thought the increase in trust taxation, especially the increase in the special rate for trust income, may have been partly responsible. After all, the tax environment for the undistributed income and capital gains of trusts is not what you would call particularly friendly.

Of course, it may be the fall in the number of trusts reporting is not due to a reduction in the number of trusts per se, but a change in their investment strategies so as to reduce the amount of reportable income and gains.

The number of interest in possession trusts reporting has also fallen and this could be for different reasons to those for discretionary trusts, as mentioned above. The fall in IIP trusts reporting (assuming the underlying cause is that the trusts have been wound up) could be tracked to the IHT changes in 2006 applying the relevant property regime to them, thus making them less attractive.

Life assurance-based investment bonds are non-income and non-capital gains producing assets, which keeps them out of assessment until any accumulated gain (or deemed gain on part withdrawal) is realised.

Trusts that have got the message in relation to bond investment would not need to report year-on-year daily accumulations to the extent of the bond.

The tax case for investment bonds as a trustee investment has been strengthened further since the dividend allowance of £5,000 (to be reduced to £2,000 next April) was denied to trusts. Combined with the high income tax and CGT rates, with low allowances and exemptions, this leads to a compelling case for bonds.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

Recommended

3

Tony Wickenden: Create your own Govt-approved tax haven

My last couple of articles have been looking at the possibility of the UK becoming a tax haven if we cannot obtain an “acceptable” Brexit deal from the European Union. I have also observed how, with the benefit of advice, someone living in the UK can already experience financial life in a virtual tax haven. […]

The future of active management is now

Fees under pressure. Regulatory moves against closet indexers. Rapid advances in financial technology. Shifting sentiment among investors. Such mounting challenges have led to widespread speculation about active management’s shrinking future. But a closer look inside intelligent portfolio construction today tells a story of expanding roles, added value, and innovative risk-adjusted, lower-cost solutions. Four investment experts […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com