The upcoming Budget could trigger a steep decline in new trusts, according to Eugenia Campbell, private client director at RSM UK.
In a blog post, Campbell discussed how rumours of restrictions on business relief and agricultural relief could affect the playing field for trusts going forward.
She said: “During the last Labour government, Gordon Brown as chancellor introduced extensive changes in 2006 to the taxation of UK trusts.
"Subsequently, the number of trusts submitting self-assessment tax returns has fallen from 210,000 in the 2005-06 tax year to 141,500 in the 2021-22 tax year, a drop of almost one-third.”
Campbell explained how the latest IHT statistics indicate that the actual tax paid as a result of trust IHT charges may be less than initially expected based on headline rates.
“For example, in the 2021-22 tax year, HMRC’s latest estimates show that only 48 chargeable events, with a combined chargeable value of £42mn were subject to entry charges. These entry charges generated just £2mn of IHT, giving an effective entry charge rate of less than 5 per cent.
“The total of IHT receipts from trusts in the 2021-22 tax year is estimated at just £52mn, of which the bulk – £42m – came from 10-year charges.
"The total IHT receipts from trusts is less than one per cent of the almost £6bn of IHT liabilities in that year, a drop in the ocean when compared to the IHT assessed on deaths,” she explained.
The falling number of trusts may indicate that many taxpayers do not understand how they operate, according to Campbell.
However, she believed the fact the majority of IHT on trusts appears to be collected from 10-year charges suggested that long-established trusts were valued by taxpayers.
Campbell said: “There are rumours that restrictions to agricultural relief and business relief may feature in the upcoming, first Budget of the new Labour government.
"Such a move may be one more step towards the demise of trusts, given that it appears that a large proportion of assets contributed into trusts now benefit from these reliefs.
“However, if valuable IHT reliefs are restricted or withdrawn, assets already held in relevant property trusts, benefiting from lower, ongoing, IHT rates may remain the ideal home for valuable and relatively illiquid assets.”
She thought the potential rumoured tax changes could accelerate the decline in the use of trusts even though they had an “important place in modern society”.
“Trusts should not be the preserve of a select few and if reform is coming, then there may be an opportunity to consult and expand the opportunity for their use by families,” she added.
alina.khan@ft.com
