91̽»¨

Whilst the recent focus for many has been on the declining trust in the country’s economic strategy, show that the number of trusts is also in significant decline.

The statistics released last week show that the number of trusts submitting UK tax returns has fallen by nearly a third in the last 15 years, from 210,000 in the year to 5 April 2006 to 141,500 in the year to 5 April 2021. The pace of the decline also appears to be quickening. Over the last five years, the number of trusts in self-assessment has fallen by 23,500 or 14%, from 165,000 in the 2015/16 tax year. In the 2020/21 tax year alone, the number of trusts fell by nearly 6% compared to the previous year.

Given the sliding numbers of trusts, many are unfamiliar with what trusts are and the issues they can help resolve. Their history can be traced back to the times of the Crusades, with knights needing someone to oversee their property whilst they were away from the country. In modern times, trusts are commonly used by parents or grandparents as a means of making gifts of assets that their children and wider family members can benefit from.

For example, rather than gifting an asset directly to a grandchild, a grandparent might transfer an asset to a trust which their grandchild can benefit from. The trust allows for the grandparent to make a gift but also retain control of the asset during their lifetime. In some ways, the term trust might be seen as ironic as they may be established in such situations because the person making the gift doesn’t necessarily trust a recipient to receive a gift directly.

A trust should in theory serve an important role for families wanting to make gifts from one generation to another or to provide a lasting pot for future branches of the family tree to benefit from. earlier this year highlights how various factors are likely to widen the gap in wealth between generations in the UK. In that context, trusts could form an important part of the toolbox to help ease that issue.

The reality is that they are unlikely to do so anytime soon. The accelerated decline in the use of trusts can be put squarely at the door of their tax treatment since 2006. At that time, the then chancellor Gordon Brown brought in unexpected changes to the taxation of trusts. A key change was that nearly all trusts were made subject to Inheritance Tax rules that can trigger an upfront 20% tax cost when gifting assets into trusts over a certain value. 

Part of the motivation for the 2006 changes may have been that trusts were being used as vehicles for Inheritance Tax avoidance. The merits of such a justification are questionable with the benefit of hindsight as the changes have not really altered taxpayers’ behaviour or attitude to Inheritance Tax. It has simply encouraged taxpayers to explore different routes to achieve a similar goal. It is about time that trusts had a parole hearing to consider whether their tax treatment is appropriate and free them to fulfil the important societal role they were intended to play.