In 2006, the entire IHT regime for trusts changed. A&M trusts could no longer be created. Any new life interest trusts were taxed under the so-called ‘relevant property regime’, which previously applied only to discretionary trusts. That regime imposes a 20% charge on assets transferred into the trust (for any value over the settlor’s available nil rate band, which is currently £325k), ten-yearly charges of up to 6% of the trust fund, and also exit charges when funds are distributed to beneficiaries.
The swingeing changes arose as a result of the Government’s suspicion that trusts were simply being used for tax avoidance purposes, without any understanding of the protective benefits of A&M trusts particularly, and the flexibility for succession planning provided by other trusts, appreciated by people at all wealth levels.
Lobbying resulted in concessions being made for trusts arising on death for bereaved minors and young people up to 25, and life interest trusts created by Will.
No concessions were made for trusts created in the settlor’s lifetime, with the result that lifetime trusts began to fall out of favour with families in the UK who did not wish to incur a 20% tax charge to create a trust for their children or grandchildren.
The popularity of trusts has been further undermined by subsequent regulatory changes, with the introduction in the UK of the trusts registration service (TRS) in 2017 to comply with the European Union’s Fourth Money Laundering Directive (4MLD ). The scope of the requirement to register on the TRS will increase in March 2022, following implementation of the EU’s fifth money laundering directive (5MLD) in January 2020. This is still under consultation, and further details should be available soon.
Family investment companies
With the decrease in popularity of the trust, the family investment company (FIC) has become a popular alternative.
The shareholders and directors of a FIC are generally family members. If appropriate, non-voting, or preference shares, may be given to some or all of the children so parents may control their children’s access to wealth until they reach maturity.
FICs have not (to date) been subject to the same level of suspicion or scrutiny as trusts and the applicable tax regime is relatively benign. They are liable to corporation tax (currently 19%) rather than income tax (up to 45% for trustees) and capital gains tax (18% or 28%). However, HMRC are understood to be taking an increased interest in FICs, and it is conceivable that their tax advantages may be reduced in time.
From a succession planning perspective, FICs are more of a blunt instrument than trusts as it is more difficult to take account of the differing circumstances of family members. This can be mitigated to some extent by issuing different classes of shares to family members. A well-drafted set of articles and a detailed shareholders’ agreement can also enable directors of the company to more finely tune their responses to different family scenarios. Where appropriate, an overarching family charter or constitution, can provide a complete family governance structure even without the additional benefits and flexibility offered by a trust.
However, the flexibility and protection afforded by a discretionary trust can be used in the context of a FIC. For example, the voting shares (which may, in themselves, be of little value) can be held in a discretionary trust, meaning that the often important division between benefit and control is preserved.
The future of trusts
Even with the unparalleled level of trust regulation now in place, the stigma of tax avoidance, evasion and money laundering persists in many quarters.
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