Can trusts still be trusted? New laws that could change what advisers recommend for Inheritance Tax mitigation

In the latest government anti-money laundering crackdown, an estimated two million UK trusts will have to register to HMRC this year, more than ten times the existing amount – according to the Association of Taxation Technicians (ATT).1

Failure to register a trust on time could lead to fines or even a criminal record – although the exact requirements are still pending final decision.

Therefore, it is important to understand the implication of these changes for the hundreds of thousands of trustees and beneficiaries expected to be affected.

What is a trust?

Firstly, trusts are used in wills for estate and inheritance tax planning because they allow people to control how their assets are used.

Trusts can be used to provide for a person’s children, grandchildren, vulnerable adults or chosen charity. It is one of the oldest methods of estate planning and asset protection in existence today.

However, despite popular opinion, the tax advantages that a trust offer have been steadily reduced by successive governments over the past few decades – In 2006, the government announced reforms which meant many assets moved into trusts became subject to a 20% IHT levy.2 Not only that, in 2016, the government increased the income tax rate for dividends held in trusts and removed a 10% tax credit.3

This means trusts no longer provide the same tax advantages as other tax-efficient services on the market, such as Business Relief (BR).

New laws and new deadlines

In 2017, after initially opposing the registration of trusts,4 the UK government decided that all UK trusts that pay Capital Gains Tax (CGT), Income tax, stamp duty or IHT must be entered on to HMRC’s online Trusts Registration Service (TRS).

Now, with the EU’s fifth Anti-money laundering directive (5AMLD) coming into effect last month,5 all express trusts will have to register on the TRS system, not just those with a tax liability.

In addition, the TRS register is set to become open to more public access. This means sensitive and complex family estate plans will be made more readily available to researchers, advisers, journalists or anyone deemed to have “legitimate interests.”

Innocent non-compliance

The rule change brings a more urgent deadline in place. As of April 1, all new trusts have just 30 days to register on the TRS system to avoid paying a late fine of £100 – £300. This is a stark contrast to the current system, which has a far more lenient deadline in place of 31 March 2021.

This combination of tighter deadlines and an increase in trusts that are to suddenly become liable for registration will place trusts in a less favourable light. Moreover, some advisers are worried that a number of lay trustees – or those with limited understanding of compliancy legislation – are at an increased risk of falling foul of these new laws. Many people already holding life assurance policies may have taken one out years ago and may not be aware of their obligation to register the trust – creating a lot of “innocent non-compliance.”

Are trusts worth it?

While trusts do offer some flexibility with distributing inheritances, these latest changes could mean that the role of the trustee will come with greater pressure, and therefore, less alluring to some.

Consequently, any interpersonal issues between the beneficiaries and the trustee could be brought to light if the beneficiaries believe the trustee is not acting in their best interest.

As a result, many advisers believe families are going to lean towards a different approach to managing their inheritances via a trust.

Considering Business Relief (BR)

With a government crackdown on trusts as an anti-money laundering device, it is worth discussing BR opportunities with your client.

As well as being able to obtain IHT relief up to five years faster than trusts, IHT planning using BR also offers investors greater security, does not take away control from their estate and also offers plenty of flexibility to the client. By mitigating several layers of risk, BR can be seen as the safer option for less experienced investors.

If you would like to find out more about BR and how it could work for your clients, get in touch with one of our experienced team members by clicking here or by calling 020 3907 6984.





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