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Are Trusts Still An Effective Way To Safeguard Your Wealth?

Weath Management

Are Trusts Still An Effective Way To Safeguard Your Wealth?

Following the last major financial crisis, the Government, facing serious pressure from the public, made concerted efforts to crack down on the use of trusts for tax avoidance.

While it is commendable that Westminster is using legislative reform to stop serious tax evasion (which costs the country an estimated £80 million per annum), as so often happens, those in the middle (the moderately wealthy in this case) get penalised the hardest and are forced to shoulder an unfair burden of trust-related taxes.

This article discusses the following points;

  • A brief explanation as to what is a trust
  • Advantages of setting up a trust
  • Statutory limitations put in place by the UK government regarding setting up trust for wealth protection
  • The setting up offshore trusts

and we conclude by asking, “Are trusts still an effective solution for safeguarding wealth”?

What is a Trust?

The concept of a trust is as follows:

The original owner of property (known as the settlor) creates a trust by conveying it to one or more trustees and manifesting an intention that it is to be held on trust for one or more beneficiaries or for the accomplishment of a particular purpose (such as creating a fund for the education of future generations). The trustees become owners in common law and hold the property or rights in trust for the beneficiaries for that purpose. The trustees come under an equitable obligation enforceable by the beneficiaries.

In order for the courts to recognise a trust, legal title of the property being placed into trust must transfer to the trustees.

Advantages of Setting up a Trust

Although setting up a trust can incur initial costs in terms of legal fees, the brutal fact is that individuals with estates of between £2-5 million bear the brunt of UK inheritance tax payments. The wealthiest 1% of individuals plan for wealth management well in advance to ensure as little of their money as possible ends up in the government’s coffers.

However, with the right advice and planning strategies, there is no reason why you and your family cannot enjoy the same benefits. The money you invest now to set your affairs in order can save your children thousands of pounds after your death.

The main advantages of a family trust are:

  • Tax planning to mitigate potential inheritance tax liability on your estate
  • Asset protection, so they cannot be sold to pay for residential or care home fees
  • Set aside money or assets for dependents who are very young or mentally incapacitated

Tax Planning

At present, inheritance tax is calculated at 40% on anything in an estate after the tax free threshold is reached. If 10% or more of an estate is left to charity the rate drops to 36%.

The tax status of a trust depends on the beneficiaries’ entitlement to the capital and/or income derived from the trust fund and the type of trust that has been set up.

Two common structures for family trusts are ‘bare trusts’ and ‘interest in possession trusts’.

Bare Trusts

A bare trust constitutes a trust where the beneficiary has absolute rights to the capital and income of a trust. A trustee holds legal title of the assets contained within the trust and administers the trust portfolio on behalf of the beneficiaries.

If the settlor survives for seven years after transferring assets into a bare trust then those assets will not be subject to inheritance tax. However, income tax may be payable on any income derived from the trust.

Interest in Possession Trust

If a beneficiary or beneficiaries are entitled to receive income from a trust as it is generated then this is known as an interest in possession trust. In this type of trust the beneficiary may never receive access to the capital.

Assets transferred into this type of trust may be subject to an inheritance tax to be paid every ten years after the date the trust was set up if the assets were transferred on or after the 22nd March 2006 (more on this later).

Either type of trust can be discretionary (meaning the trustee distributes the benefits of the trust as he or she sees fit) or fixed (the trust document outlines how the benefits are to be divided between the beneficiaries).

Statutory Limitations

Protecting wealth via the creation of a trust (or trusts) became much harder in 2006. That year, on the 22nd March the Budget delivered sudden, sweeping changes to the rules of inheritance tax.

The changes were introduced by the Finance Act 2006. This Act widened the scope of trusts affected by the ‘relevant property regime’ which provides for inheritance tax charges throughout the existence of a trust.

In simple terms, if a new lifetime trust was created on or after the 22nd March 2006 and the assets transferred to the trust exceed £325,000.00 then the excess over this amount is subject to a tax charge every ten years and an exit charge if the property ceases to be owned by the trustees (for example it is distributed to the beneficiaries’).

Both of these charges are a form of inheritance tax and there are very few examples of trusts that are not subject to the relevant property regime.

Why is this relevant? Because it is all about to change.

The government announced in the Autumn Statement 2014, plans to simplify the calculation of inheritance tax charges on trusts. It also plans to target tax avoidance through the use of multiple trusts. The proposed changes will affect those that are using multiple trusts, often termed ‘pilot trusts’, as a way of reducing inheritance tax.

The key new idea is the concept of a settlement nil-rate band (SNRB) to be shared between all trusts created by the same settlor on or after the 6th June 2014. The settlor would be able to choose how to allocate his SNRB between the various trusts. The SNRB would have the same value as an individual’s (presently £325,000).

Assets - SubAre Offshore Trusts the Answer?

An efficient offshore trust is where the trustees reside on a low/no tax jurisdiction. Although they sound glamorous and do hold some advantages, they are subject to strict anti tax avoidance legislation.

Offshore trusts provide a particular advantage to individuals wishing to avoid paying capital gains tax, income tax, inheritance tax and stamp duty. This is because the property is owned by the trustees; therefore, the applicable tax rates are those applied in the jurisdiction the trustee/s reside in.

However, the Government has made it clear it plans to crack down on tax evasion gained through offshore trusts. In December 2014, Chancellor George Osborne MP announced that the sales of UK registered property by non-UK residents will be subject to capital gains tax and this is likely to include properties held in trust. The HMRC has also clamped down on offshore trusts used to deliberately hide assets and wealth.

It is essential therefore, that if you are considering setting up an offshore trust that you remain compliant with UK legislation.

Note: The penalties for tax evasion can be as high as 200% of the tax underpaid, with the added risk of criminal prosecution.

So Are Trusts Still an Effective Solution for Asset Protection?

Despite the legal reforms over the past few years and the fact that these are set to continue, trusts still remain an effective way to safeguard your assets and plan your taxes, although it may be fair to say their heyday has long past. The most important aspect of creating and/or maintaining a trust in today’s economic climate is ensuring ongoing compliance with UK tax law by obtaining professional legal and financial advice and performing due diligence to ensure the trust is meeting all of its current tax obligations.

To find out more about setting up a trust please click here or phone our London office on 020 3588 3500.

If you wish to comment on this post please feel free to add your thoughts in the comments section below.



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