Back to Blog

The decline of trusts for tax planning

The decline of trusts for tax planning

Previously, HMRC set a deadline of September 2022 for certain trusts to register with the Trust Registration Service (TRS) as an anti-laundering measure against tax fraud – resulting in a significant increase in registrations.

Despite the surge in TRS registrations in 2022 and beyond, the number of trusts filing self-assessment tax returns is declining. The figures dropped by 3% by the end of the 2021–2022 tax year compared to the previous year, with a reduction of 37% between 2003–2004 and 2021–2022.

This decline in the number of trusts submitting self-assessment returns is unsurprising, considering the advantages of using a trust have been eroding as regulations have become stricter – so why might trusts still be beneficial in some cases?

Fewer ‘interest in possession’ trusts

The number of interest in possession (IIP) trusts has seen the largest reduction since 2003–2004, falling from more than 100,000 down to 44,000 per the most recent figures. This is mostly occurring with trusts at the lower end of the scale, which have trust income below £10,000.

The likely cause is the inheritance tax (IHT) scheme for IIP trusts. Introduced in 2006, this scrapped most favourable tax treatments for these trusts, which became subject to IHT charges in the same way as discretionary trusts. For example, a lifetime gift in an IIP trust could incur a 20% tax charge.

This type of trust has therefore fallen out of favour, as they are only beneficial for those with significant assets that are worth the compliance costs.

However, IIP trusts are still commonly used for Wills, as certain arrangements can still enjoy favourable IHT treatment. For example, a spouse can be given lifetime rights (such as staying in a marital home), and the capital can subsequently be passed to children – which can be especially important if there are children from previous relationships.

Trust planning in 2024

Trust planning is undoubtedly still popular for individuals with a high net worth, as trusts allow generational wealth to be passed down with protections against marriage breakdowns, bankruptcies, or family disagreements.

However, with rumours circulating that the government could scrap business reliefs and agricultural property reliefs in the future, the use of trusts could be limited even further, with assets in trust that previously qualified for relief becoming liable for IHT charges.

That said, trusts can still be a viable option for specialist tax planning and asset management. The latest information on trusts from HMRC can be found online, or you can consult a tax adviser for personalised guidance on placing assets in trust to manage tax liabilities.

For help with trusts, from tax advice to filing self-assessment returns for trusts, contact gbac by calling 01226 298 298 or emailing info@gbac.co.uk. Our accountants in Barnsley will be glad to assist you with your financial planning.

Back to Blog