'Whether the decline in trusts is due to taxation, regulation or some other factors, they remain excellent vehicles for protection'

14 Dec 2020

CIOT committee member Megan Saksida writes a guest blog on the merits of using trusts and asks why there has been a decline in their use

The 2018/19 trust statistics have recently been issued by the Government. Among the information provided is the number of trusts in existence. Both interest and possession trusts and discretionary trusts, have yet again fallen. 

The absolute number of trusts has continually fallen since the records the Government disclosed began. In 2004/5 there were 220,500 trusts but the 2018/19 figures record only 151,000 trusts. This represents a drop of 32 per cent over the 14 years period and a drop of two per cent from the previous year 2017/18. 2017/18’s figures were a staggering six per cent drop on the 2016/17 number. A quarter of the drop in the number of trusts has therefore occurred in the last two years.

Trusts are incredibly useful structures in that they protect. They can protect children from a first marriage from a spendthrift second spouse while still allowing the surviving spouse to be completely provided for during their lifetime. They can protect beneficiaries from themselves should they be unable to manage their own money either through age, mental illness or substance abuse. They can protect important business and farming assets from division. Trusts can protect the vulnerable and ensure the heirship provisions so common in Europe are avoided. Trusts can protect high net worth and high profile individuals and can protect gifting against bankruptcy and divorce. With such a variety of protective uses, they can be a vital part of a strategic planning process and there must consequently be a good reason why the use of these important vehicles is falling so drastically.


Tax is often blamed for such a reduction and it is definitely true that the tax burden is significant within trusts, particularly on discretionary trusts subject to the “rate applicable to trusts” (RAT) for income tax. The RAT charges income tax on the trustees at a rate of up to 45 per cent and although the beneficiary can reclaim the tax credit of up to 45 per cent depending on their marginal tax rate, this is a cumbersome and time consuming reclaim process. Further, such a process is not conducive to the 'simplicity' concept so desired by the Government, and the first of their four key principles for which they strive for in taxing trusts. Despite the higher discretionary trust tax rates; of the £715 million government receipts from income tax in trusts in 2018/19, discretionary trusts paid a mere £160 million of this number, compared to the significantly larger receipt from interest in possession trusts of £525 million, with 'other' trusts such as charitable trusts and estates making up the final £30 million. Furthermore, the drop in numbers for discretionary trusts has been consistent with that of interest and possession trusts, indicating that this income tax burden is not the main factor for the reduction.

In addition to income tax, the capital gains tax allowance available to an individual worth £12,300 annually, is halved for trustees, and the rate for the tax is always the higher rate (20 per cent and 28 per cent for other and residential property respectively) in both discretionary and interest and possession trusts. This means the ‘neutrality’ and ‘fairness’ principles, the second and third of the four key principles that the Government strives for in trust taxation are also unlikely to be met. The statistics show that trusts pay as much income tax as they do capital gains tax with £715 million of capital gains tax paid in 2018/19, up nine per cent on the previous year.

Due to the significant changes in the trust taxation system post 21 March 2006, virtually all lifetime trusts since then are inside the relevant property regime for inheritance tax. This means that almost all settlors will have a chargeable lifetime transfer chargeable at 20 per cent (charged on transfers above the value of any nil rate band they have left over). In addition, there will be exit charges and periodic charges of up to six per cent.


Regulation however, cannot be ignored when considering the drop in the number of trusts. Although ‘transparency’ is at the forefront in the Government’s ideal qualities of a trust, and the final of the four sought after principles of a trust, the requirements of trust regulation may be one of the causal factors of the decline. In 2017, steps were taken towards more trust transparency by the creation of the UK’s Trust Registration Service (TRS). This was created in accordance with the Fourth Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (4MLD) and was established to gather information and data about trusts that were liable to UK taxes such as described above. Given that this information is disclosed to law enforcement agencies and other parties such as insurance companies, banks and financial intermediaries it may be the case that settlors and beneficiaries no longer wish to be exposed to such sharing of information and no longer therefore feel the benefits of the protection of the trust outweigh the costs. 5MLD has now been introduced (from 6 October 2020) and the impact of this latest directive, is that trusts even without such tax liabilities, will also need to register, and the information provided will be even more widely available to interested parties.

There were increases in trust registrations during the year from 85,000 in March 2018 to 107,500 in March 2019. This trend will no doubt continue to rise given 5MLD and the fact that there were a total of 137,500 trusts submitting self-assessment tax returns in 2018/19.

Whether the decline is due to taxation, regulation or some other factors, trusts remain excellent vehicles for protection. The Government’s four underlying principles for the taxation of trusts of simplicity, neutrality, fairness and transparency, are worthy and noble concepts and although the current taxation and regulation provisions may not meet these four fully at present, it is heartening to see the consultation document containing an openness to change. Once the thought process and the cases for and against changes have been made, we may see a return to increasing numbers of trusts and individuals using trusts for the purpose they most achieve: to protect.

Guest blog by Megan Saksida. Megan has been lecturing and writing for both accountancy and taxation issues for more than 27 years and is currently lecturing all the tax papers for the Society of Trust and Estates in England and Wales certificate and diploma exams, the CIOT CTA 'Inheritance tax, trusts and estates' advisory exam, and the ACCA tax exams. Megan has a personal specialty in inheritance tax and is the author of “IHT- Lifetime transfers and the death estate” published by Claritax books in 2020. Megan regularly writes for the CIOT Taxation Adviser magazine amongst other publications and is on the CIOT Private Client Committee, the European Committee and the Education Committee.

The CIOT's submission to government on the Taxation of Trust can be found on this link.