Advisers have championed the benefits of family trusts after government statistics showed fewer families were using them to plan their finances.
Official data from HM Revenue and Customs, published yesterday (September 26), showed the number of trusts and estates in the UK registering with the taxman had fallen to 149,500 in 2017/18 — 6 per cent down on the previous year.
Trusts have to register with HMRC if they pay or owe capital gains tax, income tax or inheritance tax.
According to HMRC, the number of estates and trusts registered fell for the fourth consecutive year as part of a “long term downward trend”, dropping 29 per cent over the past 12 years.
Source: HMRC.
A trust is a legal vehicle to pass assets to a trustee, who in turn holds these assets in a ‘trust fund’ for the beneficiary.
Wealthy families often create trusts to minimise hassle and fees and also to pass on assets in a tax efficient way.
Provided certain conditions are satisfied, the money or property in the trust is no longer in the donor’s possession, which means it can avoid an inheritance tax levy.
Mike Hodges, partner in the Private Wealth team at Saffery Champness, thought the popularity of trusts had suffered under tax and regulatory changes.
The advantages of trusts have slowly been eroded in recent years. In 2006, Gordon Brown introduced reforms which meant most assets moved into trusts became subject to a 20 per cent inheritance tax levy.
In 2016, the government increased the income tax rate for dividends held in trusts and removed the ten per cent dividend tax credit.
He said: “Trusts have become something of a political football. Despite HMRC’s own acknowledgment that trusts have a number of benign uses, in the public mind — and it seems also in the view of many politicians — trusts are inextricably linked with tax avoidance.
“As a result, they are seen as fair game for further rule changes.”
But advisers have argued trusts can be a vital part of financial planning and help resolve a number of common financial problems.
Sean McCann, chartered financial planner at NFU Mutual, said: “Many believe that trusts are only for the very wealthy, the reality is they can be very simple and help resolve a number of common financial problems.
“Protecting life insurance pay-outs from inheritance tax, providing income for a surviving spouse while making sure your assets end up with your children or making provision for vulnerable relatives are just some of the areas where trusts can help.”
Kay Ingram, director of public policy at LEBC, said financial planners should always consider the appropriate use of trusts for each client.
She thought they were a vital tool for families in which partners were not legally married as cohabitants had no IHT exemption, so the trust enabled life cover to be left to dependents free of IHT.
She added: “Those leaving assets or making lifetime gifts to family members may also wish to retain control over the timing of the distribution of capital and income to different beneficiaries.
“This may be for tax efficiency or to protect the funds from the effects of divorce or bankruptcy of a beneficiary.”
Sebastian Riemann, adviser at Libra Financial Planning, agreed, adding trusts were a "fundamental part" of the advice process particularly for protection.
He said: "They can be used for a number of reasons including ensuring a swift pay out on claims and guaranteeing the benefits go to the intended parties."
Mr Riemann added there were many different types of trusts and benefits attainable, adding it was a highly complex area which required professional advice.
He thought part of the reason the number of trusts was falling was because more protection plans were being taken up directly by the consumer without full consideration of the options available.
imogen.tew@ft.com
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