HMRC research suggests trust changes are 'unnecessary'

Research published by HM Revenue & Customs on trusts suggests last year’s Inheritance Tax changes were unnecessary, says Scottish Life International.

In last year’s Budget report in March, Gordon Brown MP, Chancellor of the Exchequer, announced changes to the way trusts are taxed to try and minimise the risk of IHT avoidance.

The changes, which apply to new trusts created since 22 March and to older trusts from 6 April 2008, mainly affect interest in possession (IIP) trusts and effectively mean any assets will be subject to chargeable gains when paid to the beneficiary.

However the 155-page report: ‘Research on Trusts: Experience of Setting Up and Running Trusts’, a survey of settlors and trustees conducted by Gfk Business on behalf of HMRC reveals tax avoidance is not the main reason for setting up a trust.

Instead it says the main motivation relates to having the ability to control assets, for example being able to pass them on to children or grandchildren, to provide for a beneficiary in a particular way, to withhold assets until children reach a certain age, or to ensure money stays within the ‘bloodline’.

And the research reveals while tax tended to be a secondary motivating element for setting up a trust, when asked specifically if tax planning was an important factor in creating a trust, 49% believed it to be unimportant, while just 46% felt it was important.

However the findings indicate tax planning is more important to trusts with a high income, where 60% felt it was an important element, while it says among these the underpinning issue is the ability to reduce tax liability, mainly IHT.

In addition it says trusts set up recently are more likely to consider tax as an important factor, with 48% of the trusts set up between 2000-2002 falling into this category compared to just a quarter of trusts set up between 1960-1974.

But Gerry Brown, technical manager at Scottish Life International, says the research shows trusts are being used today to retain wealth within the extended family, in the same way as they were used hundreds of years ago.

He adds: “In the past the use of trusts could offer significant tax advantages. However anti-avoidance legislation over the past 30 years, culminating in the significant IHT changes announced in last year’s Budget, has eliminated most of these advantages.”

“Indeed, in the light of the findings of the research report, it could be argued that last year’s changes were unnecessary.”

If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email nyree.stewart@incisivemedia.com