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Advisers must consider trusts ahead of looming tax storm

VG Debbie Lumsden - LF

By Debbie Lumsden, private client director at VG

As we begin 2022 with Covid-19 continuing to cause widespread disruption and economic uncertainty, it is hard to know what this year will hold. However, there is one action advisers should be considering as a priority this year – exploring the potential benefits of trust planning for individuals and families alike.

With the cost of Covid-19 continuing to rise and further disruption always possible, the pandemic is set to continue having a divergent impact on people’s wealth – bringing financial hardship and job losses for some, while others remain relatively insulated.

What is even more certain is that support measures and previous interventions, such as the furlough scheme, will still need to be paid for. The UK now faces the highest tax burden on individuals since the 1950s – but this may just be the beginning of potentially punitive changes to taxation, as the government continues to explore options to address the skyrocketing national debt.

In this context, there has hardly ever been a more worthwhile time for advisers to explore the benefits of trust planning. There are many reasons for establishing a trust, but they represent a crucial tool to help individuals preserve wealth in later life, and for future generations. Advisers should make this a priority at the start of the year, to ensure the process is completed in good time ahead of the new tax year on 6 April.

Preserving wealth

A trust is a legal binding fiduciary relationship in which one party, known as the settlor, transfers assets to another party, the trustee, who is entrusted with legal title to the assets for the benefit of a third party, the beneficiary.  Once assets are settled into an offshore trust, they no longer belong to the settlor, which can provide certain tax advantages under current UK tax legislation; namely mitigation of inheritance tax (IHT) and capital gains tax (CGT).

IHT Case study

Mrs Smith, a UK resident but non-UK domiciled individual, has decided to invest in UK commercial real estate valued at £5m. If she holds these assets in her own name, the asset would be subject to 40% UK IHT at the time of death meaning her estate could be faced with a £2m tax bill upon her death. However, the IHT liability on death would not arise if the property was held in a Jersey Trust and Company structure.

In addition, trusts can be used to shelter non-UK assets from IHT prior to individuals becoming deemed domiciled in the UK for all tax purposes, meaning a saving on those assets of 40% IHT on death.

IT and CGT Case study

Mr Kahn, a UK resident but non-UK domiciled individual, settles an offshore trust prior to his 15th year of tax residence in the UK. Consequently, he is not taxed on the income and gains on those assets on an arising basis.  Instead, foreign income and gains to roll-up in the trust free of tax and will only be taxed at the point at which a beneficiary receives a benefit, and the applicable taxation will depend on the recipient’s country of residence at the time.

This highlights another benefit of trusts; it facilitates the ability to control the timing and circumstances under which wealth is passed rather than leaving it to chance. For example, people are now increasingly globally mobile, meaning it may be possible to structure benefits for a trust when beneficiaries are in low or no-tax jurisdictions. This means they are able to benefit from a larger portion of the family wealth.

Keeping it in the family

Aside from the tax benefits for non-domiciled individuals, both offshore and domestic trusts can also be used to ensure continuity of ownership and prevent fragmentation of family assets following the death of the settlor.

Difficulties can arise for those without the necessary arrangements in place in such circumstances – as evidenced by the untimely death of actor Chadwick Boseman. Boseman died in 2020 without a will, meaning the decision of how his estate should be distributed was left to the courts, rather than his family.

Family members can also play a pivotal role in family Trust structures. For example, family members may take the role of Trust protector – which effectively oversees the trustees. While Jersey Trusts are usually managed by a professionally regulated third party trustee, it is possible in Jersey to establish a private trust company (PTC). This is effectively the individual’s own trust company, which gives more control to family members.

Family members can sit on the board of the PTC, either alongside a professional trust company or not, but must only provide trustee services to the trusts of a single family, and the not the public generally. This is particularly suitable for large families planning for an intergenerational wealth transfer and have a desire for younger family members to participate in how the wealth is managed.

Safeguarding and protection

Trusts can also be used to protect assets against political risk – by removing them from a location with an unstable or uncertain political environment. Additionally, they can be used to avoid forced heirship and probate formalities. For example, some countries stipulate assets need to be divided a particular way when inherited, and those rules might not align with how someone wishes their assets to be shared. Trusts can also be used for charitable and non-charitable purposes – ensuring the assets will always be used for the purposes intended by the settlor.

Horses for courses

Trusts can hold a wide range of assets depending on their type and location. For example, Jersey trusts can own most types of movable or immovable property, other than Jersey land. This can include real estate, traditional investment portfolios, artwork, cash, public or private equity investments, and even yachts.

Regardless of the assets in question or the motivation for establishing a trust, it is crucial advisers consider the benefits of role of trusts in the wealth and succession planning of wealthy individuals. With tax changes on the horizon, the new year marks a perfect opportunity to get ahead of the curve of future tax changes and ensure future finances can weather the coming storms.

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