New government statistics show that the number of trusts submitting UK tax returns is declining year on year, with trusts paying £500m less in income tax than in the previous year.
In newly published statistics, the number of trusts and estates in the UK preparing a self-assessment tax return has fallen in the 2016/17 tax year to 156,500. Given that in 2003/04, the equivalent number was approximately 225,000, that means the number of such trust and estates has decreased by around 30% in 13 years. It is the third year in a row where there has been a significant decline in the number of such trusts and estates, with the number reducing by 7,000 in the 2016/17 tax year alone.
So, what is driving this demise of trusts? This may be a lack of understanding and familiarity of trusts. A research report was recently undertaken by the Ipsos MORI Social Research Institute which explored the motivations for establishing trusts. It was found that whilst the individuals surveyed had a high basic awareness of trusts prior to establishing one, any detailed knowledge was varied and depended on factors such as prior experience of trusts, professional advice taken and knowledge through their own work.
It seems that trusts may be subject to a vicious circle: individuals are put off establishing trusts as they do not understand them whilst a key source of such understanding, the prior experience of trusts, is becoming more limited each year as the number of trusts in self-assessment falls.
The future of trusts seems, more than ever, to be in the hands of professional advisers advising their clients to establish and retain them. Trusts still have an important role to play and remain appropriate in many family scenarios.
In their recent consultation on The Taxation of Trusts, HMRC outline that ‘trust taxation should be neutral: their tax treatment should neither encourage nor discourage the use of trusts’. However, in the analysis accompanying the recent national trust statistics, a number of reasons have been cited for the potential decline and they largely point to changes in the tax treatment of trusts making them less attractive.
The analysis accompanying the statistics points to two main changes in the taxation of trusts over the last 13 years that have had an impact on their numbers. Firstly, in 2006, significant changes were brought in by the then chancellor Gordon Brown, relating to the taxation of trusts. In particular, nearly all trusts were made subject to IHT rules that can result in a 20% tax cost upfront for settling assets on trust.
Secondly, trusts now pay income tax at the very highest tax rate for individuals (currently up to 45%). The effect of income tax rates can be seen to be a correlating factor on the number of trusts and estates in self-assessment. The analysis highlights that when, in 2010/11, the personal and trust income tax rates went up to 50%, the numbers of trusts fell even more sharply. Likewise, the only rise in trust numbers in the 13 years to 2016/17 was when that 50% income tax rate was reduced to 45%. It seems there are now very few trusts in the UK with significant levels of income and only 3,000 trusts in the UK had income over £100,000.
There are a number of different factors at play in the decline in the number of trusts, with some of the onus on professional advisers to stem the tide by helping their clients understand the benefits. Based on the statistics, it seems reasonably clear that elements of the current taxation rules have made them less attractive with families now exploring other means of achieving similar objectives such as family investment companies.
It will therefore be interesting to see HMRC’s response to the consultation on trusts in due course and whether it acknowledges that elements of its tax treatment may have led to a reduction in trusts. There is still a proper place for trusts, and it is hoped that tax treatment will not drive them out of existence.
Chris Etherington, RSM UK (RSM’s Weekly Tax Brief)
New government statistics show that the number of trusts submitting UK tax returns is declining year on year, with trusts paying £500m less in income tax than in the previous year.
In newly published statistics, the number of trusts and estates in the UK preparing a self-assessment tax return has fallen in the 2016/17 tax year to 156,500. Given that in 2003/04, the equivalent number was approximately 225,000, that means the number of such trust and estates has decreased by around 30% in 13 years. It is the third year in a row where there has been a significant decline in the number of such trusts and estates, with the number reducing by 7,000 in the 2016/17 tax year alone.
So, what is driving this demise of trusts? This may be a lack of understanding and familiarity of trusts. A research report was recently undertaken by the Ipsos MORI Social Research Institute which explored the motivations for establishing trusts. It was found that whilst the individuals surveyed had a high basic awareness of trusts prior to establishing one, any detailed knowledge was varied and depended on factors such as prior experience of trusts, professional advice taken and knowledge through their own work.
It seems that trusts may be subject to a vicious circle: individuals are put off establishing trusts as they do not understand them whilst a key source of such understanding, the prior experience of trusts, is becoming more limited each year as the number of trusts in self-assessment falls.
The future of trusts seems, more than ever, to be in the hands of professional advisers advising their clients to establish and retain them. Trusts still have an important role to play and remain appropriate in many family scenarios.
In their recent consultation on The Taxation of Trusts, HMRC outline that ‘trust taxation should be neutral: their tax treatment should neither encourage nor discourage the use of trusts’. However, in the analysis accompanying the recent national trust statistics, a number of reasons have been cited for the potential decline and they largely point to changes in the tax treatment of trusts making them less attractive.
The analysis accompanying the statistics points to two main changes in the taxation of trusts over the last 13 years that have had an impact on their numbers. Firstly, in 2006, significant changes were brought in by the then chancellor Gordon Brown, relating to the taxation of trusts. In particular, nearly all trusts were made subject to IHT rules that can result in a 20% tax cost upfront for settling assets on trust.
Secondly, trusts now pay income tax at the very highest tax rate for individuals (currently up to 45%). The effect of income tax rates can be seen to be a correlating factor on the number of trusts and estates in self-assessment. The analysis highlights that when, in 2010/11, the personal and trust income tax rates went up to 50%, the numbers of trusts fell even more sharply. Likewise, the only rise in trust numbers in the 13 years to 2016/17 was when that 50% income tax rate was reduced to 45%. It seems there are now very few trusts in the UK with significant levels of income and only 3,000 trusts in the UK had income over £100,000.
There are a number of different factors at play in the decline in the number of trusts, with some of the onus on professional advisers to stem the tide by helping their clients understand the benefits. Based on the statistics, it seems reasonably clear that elements of the current taxation rules have made them less attractive with families now exploring other means of achieving similar objectives such as family investment companies.
It will therefore be interesting to see HMRC’s response to the consultation on trusts in due course and whether it acknowledges that elements of its tax treatment may have led to a reduction in trusts. There is still a proper place for trusts, and it is hoped that tax treatment will not drive them out of existence.
Chris Etherington, RSM UK (RSM’s Weekly Tax Brief)
