Trusts: reviewing the benefits
Trusts: reviewing the benefits
The prospect of new trust regulation from HMRC may set alarm bells ringing for those who establish and benefit from trusts as well as trustees. However, the latest changes are administrative in nature. This is very different to legislation introduced in 2008, which constituted a dramatic shake-up of trust taxation, including a 10-year charge on the value of their assets.
The new regulation will require most UK trusts to be registered, with only a few exclusions (see box below). Trustees should seek advice from a professional adviser to determine whether a trust requires registration and help with the registration process.
Although the new rules add to the burden of setting up and maintaining a trust, they will shed more light on an area that is still viewed as somewhat opaque. This should create greater long-term certainty around the use of trusts and accelerate their professionalisation, with fewer trusts administered solely by “friends and family.”
Making trusts work for you
There is a risk that the registration requirement adds to a misconception that trusts are complex and subject to additional scrutiny. There was a decline in their use following the 2008 changes, with many favouring Family Investment Companies instead. While the latter are useful vehicles in the right circumstances, the benefits of trusts should not be overlooked.
The key is planning around the ten-year charge. Broadly, this is levied at 6% on the value of trust assets in excess of a trust’s nil rate band.
In some cases, it will make sense to wind up a trust before the charge applies. This could be the case if the beneficiaries reach an age or other milestone that makes the use of a trust less appropriate. In other cases, the benefits of a trust structure – combined with the returns that can be generated by long-term investing – may well mean the charge is worth paying.
Control and flexibility: the key advantages
Trusts continue to offer many benefits to high-net-worth families: they allow family members to benefit from family wealth without requiring the settlor(s) to surrender complete control of how assets are used or invested. Within this general framework, those who establish the vehicle – the settlors – have many choices to make. The most important one is the appointment of trustees to oversee the trust’s assets. These trustees may be given the responsibility to make distributions as they see fit. Alternatively, they may oversee an arrangement whereby a trust’s beneficiaries are entitled to its income or benefit (e.g. the use of a house) for as long as they live.
Trusts can be useful in a wide range of circumstances. Very often, they are set up to provide for grandchildren: a settlor may specify that a trust is used to fund grandchildren’s education or help them buy a property. Increasingly, we see them used in wills (“will trusts”). For example, an individual may want to ring-fence assets for children in the event that a surviving partner remarries. They can also provide family assets with additional protection in divorce.
Trusts can, of course, also be advantageous from an inheritance tax (IHT) perspective. Assets settled into a trust are typically considered outside of a settlor’s estate if he or she survives for seven years.
There are many other situations where trusts are useful. They continue to play a valuable role in philanthropy through newer vehicles, such as Donor Advised Funds. And using trusts in combination with other planning structures – such as a Family Investment Company – can allow for highly tax-efficient investment strategies.
In our experience, the challenges associated with trusts have not come about solely due to legislative or tax changes. They are more likely to arise because not enough thought has been given to the long-term implications of their use or family dynamics have significantly changed. The ability to retain control over assets – potentially long after death – can be advantageous in some circumstances. However, too tight a rein for too long can also lead to resentment and tension.
What is the Trust Registration Service?
The UK government created the Trust Registration Service (TRS) in 2017 with a twofold purpose; to register UK trusts with a tax liability and facilitate HMRC anti-money laundering checks.
The register was initiated in response to the EU's Anti Money Laundering directives. Despite no longer being a part of the EU, the UK agreed to continue implementing the register as part of the withdrawal agreement.
Many individuals and trustees were relieved to learn that a UK trust without a “relevant tax” liability need not register.
What has changed?
In October 2020, the EU introduced new rules under the 5th Money Laundering Directive. This requires the registration of UK and some non-UK trusts regardless of the tax position (i.e. both taxable and non-taxable trusts).
The deadline for registration is 1st September 2022. Taxable trusts must be registered and declared up to date on the register annually by 31st January.
All trusts are required to register unless they are exempt (see below). The legal responsibility for registering the trust now falls on the trustees. HMRC have stated that a “lead” trustee must be appointed as the main point of contact. Details of other individuals involved in the trust, including other trustees, settlors, protectors and beneficiaries must also be provided.
Financial advisers are not currently able to register the trust on behalf of their clients. However, trustees may appoint an agent (such as a solicitor) to register the trust on their behalf.
Legal professionals holding client shares or assets as the nominee are also required to register (unless the nominee is authorised by the Financial Conduct Authority).
Some trusts are exempt from registration, including:
• Charitable trusts
• Will trusts (provided they only hold estate assets for up to 2 years after death)
• Trusts created on intestacy (or other court arrangements that do not reflect the intention of a settlor)
• Trusts for bereaved children under 18
Where a trust uses a “class” of beneficiaries, i.e. “all future grandchildren”, trustees may refer to classes of beneficiaries rather than providing details for every individual beneficiary. Once a member of a class of beneficiaries benefits from the trust and becomes named and known, the trustees must provide their details.
Avoiding the 'bare' trap
Bare trusts have been used by many individuals to set aside relatively small amounts of money for family members. They are easy to set up without professional advice, giving rise to concern that tens of thousands of people may not be aware of the requirement to register a trust.
HMRC states that “there is no specific exclusion from registration for bare trusts…however, there are several exclusions that may apply to common bare trust arrangements.”
One exemption applies in relation to a bank or building society account opened for the benefit of a child under the age of 16 (or a person over the age of 16 who lacks mental capacity). This typically creates a bare trust with an individual holding the account on trust for the benefit of a minor/vulnerable person.
This exclusion only extends to cash accounts: investments held on trust do not qualify. Individuals who have opened “nominee” investment accounts for their children or grandchildren may need to register a trust with the TRS – but there is still some uncertainty.
If there was a clear intention to make an irrevocable gift, it is more likely that a bare trust has been created and that the arrangement must be registered. Ambiguity arises when an individual "earmarks" funds for children or grandchildren while the assets remain in the parents’ or grandparents' control.
Individuals should seek professional advice to determine whether the assets should be registered as a trust or retained for themselves.
There are still many easily accessible vehicles that will not involve TRS registration, such as Junior ISAs, child bank accounts and stakeholder pensions.
We recommend that you seek professional advice from your solicitor and/or tax adviser to understand whether you need to register a trust. To discuss any aspect of financial planning, please contact your wealth planner or portfolio manager at Cazenove Capital.
This communication is for information purposes only and is based on the author's understanding of the law in force at the time of publishing. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Readers should seek professional advice for their individual circumstances.
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