The use of trusts as a tool to manage the finances of HNWs has continued its steady decline, data published this week by HMRC suggests.
The number of tax self assessments by trusts and estates fell from 146,000 at the end of the 2021 tax year to 141,500 in 2022, representing a 3 per cent decline.
It is part of a wider trend: prior to 2009, there were more than 200,000 trusts filing self assessments to HMRC. The number has been tapering off ever since and has fallen by 12 per cent since the end of the 2017 tax year.
Conversely, a new requirement by HMRC for trustees and beneficiaries to use the Trust Registration Service (TRS) has led to an increase in the number of trusts and estates counted by officials, even when no UK tax is payable. The number of trusts registered on the TRS was 33,000 in the 12 months to 31 March 2022, surging to 462,000 in the same period for 2022/2023.
While fewer trusts and estates are completing self assessments, these structures are still a prominent tax management tool for the richest HNWs. The total income from trusts and estates rose to £3.075 billion at the end of the 2022 tax year, moving above pre-pandemic highs of £3.050 billion.
Since tax changes in 2007, including the introduction of the relevant property tax regime, 'a lot of trust work and advice has gone,' says Suzanne Mynors, private client partner at Russell Cooke. 'We can't do what we used to be able to do. The benefits of trusts are really quite limited now. The majority of my practice is winding up or terminating trusts.'
'There's so much new compliance that, a few years ago, trusts didn't have to deal with,' says Wedlake Bell partner Nick Mendoza. 'I think clients are thinking, "I'm setting up a trust here with what is essentially a fairly small amount of money, do I really want to go through all of that compliance and all the costs that goes with it?" And it's just not cost effective.'
Small minority of high-value trusts produce majority of income
In the tax year ending 2022, 71 per cent of income came from just 7 per cent of interest held in all 'interest in possession' trusts, also known as life interest trusts, as the number of these structures continued to fall in line with the overall trend for trusts.
Trusts with income of more than £100,000, of which there are around 3,000, produced a taxable income of £765 million, while the 2,000 trusts holding between £50,000 and £10,000 together produced only £110 million. Meanwhile, there are 20,500 interest in possession trusts which had income of less than £1,000 each. These 20,500 structures together yielded income of less than £5 million.
'The majority of [interest in possession trusts] produce a tiny amount of income, and then there are a few that produce masses of income, and that's because they do work for people who have very significant assets,' Mynors, who has 25 years of experience in the private client world, tells Spear's.
Where only a small amount of income is produced from a trust or estate, tax advisers may recommend this is declared as part of a personal tax return rather than in a separate self assessment, Mynors adds.
These structures are worthwhile for those with significant assets producing capital gains, Mynors says, 'but for the majority of the population, they are just disproportionately expensive and onerous, and complex, and just not appropriate anymore.' For HNWs without significant holdings, the compliance and cost may be prohibitive.
Meanwhile, capital gains tax payments increased by more than a quarter (27 per cent) in 2022 from trusts, now generating £1.055 billion, which might reflect HNWs trying to realise gains in anticipation that CGT liabilities will rise. 'Last year the chancellor was hinting before his budget... that the capital gains tax rates might go up quite substantially,' Mendoza says. 'We have clients who were worried in the last year about rates of capital gains tax shooting up substantially. We had a number of clients that were doing some planning around avoiding what could be huge rate hikes, and were therefore realising gains.'
HMRC rule change behind wave of new trust registrations
HMRC’s Trust Registration Service had 633,000 trusts and estates which were registered and remained open by the end of August, although the number excludes new trusts registered after 1 April this year.
A total of 462,000 trusts and estates were registered with HMRC’s service by 31 March 2023 (all of which were still open by the end of August 2023). This represents three-quarters of the total number of trusts which are still open and registered. By comparison, 33,000 trusts and estates that are still open were registered in the previous 12 months. The figure for 2020/2021 was just 14,000.
The surge in registrations reflects a requirement introduced in 2020 on all express trusts and some non-UK trusts to register with the TRS, with a deadline of 1 September 2022, irrespective of whether the trust is subject to UK tax.
The move was introduced as an anti-money laundering measure, and requires the details of beneficial owners (including trustees and beneficiaries) to be registered with the system. The September deadline last year is behind the wave of new registrants, which has created significant new administration work for trustees and the advisory community.
'There's been a huge catch up. It's interesting that it's between 2022 and 2023 that the catch up has taken place. The deadline for registrations was 1 September 2022, so most people were doing them by that date,' Mynors says. Even though the rule change first came in October 2020, 'it was August 2022 when most people were doing them,' which created extra challenges pulling together information, such as the birth dates of all beneficiaries. 'It was absolutely manic, particularly because it was holiday season.'