Are trusts still worth trusting?

So are trusts still worth trusting?  This article by associate Isobel Rudge examines their enduring role in intergenerational planning, explores how they are taxed today, and outlines the modern registration requirements shaping their use.

Life rarely unfolds how we expect it to and, for many families, protecting against unforeseen circumstances is an important consideration in estate planning. One benefit of a trust structure is that it provides separation between the trust assets and the personal estate of both settlor and beneficiary. Such separation offers a means of protecting generational wealth against unexpected life circumstances, including but not limited to:

• Divorce. Trust assets typically fall outside the marital pot in divorce proceedings, protecting family wealth from dissipation to an individual outside the family.
• Bankruptcy. The creditors of a beneficiary generally cannot seek to recover assets from the trust as the beneficiary does not have a direct entitlement; instead, they simply have a hope of benefiting from the trust. 
• Care home fees. With careful planning, trust structures can help preserve wealth from being depleted by means-tested care costs provided that the settlor does not intentionally deprive themself of assets. 

Unlike an outright gift, a trust allows the settlor to specify how and when beneficiaries receive assets. The terms of a Will, for example, may specify the age at which the younger generation can benefit – be that at age 18, 25 or 30 – with the deferral of funds allowing time for beneficiaries to mature and grow in their understanding of financial responsibility.  

Trusts also provide a mechanism by which you can adapt to changing circumstances without the need for the original settlor to intervene (or, indeed, to still be alive). Provided the trust deed grants sufficiently broad powers, trustees can respond to shifts in the needs of beneficiaries, changes in tax law, or evolving family dynamics.  

While trusts offer significant planning advantages, they are subject to a specific tax regime and understanding this framework is essential before establishing any trust.

The transfer of assets into most lifetime trusts can give rise to an immediate inheritance tax charge of 20% if the cumulative value of such transfers exceeds the nil-rate band (currently £325,000).  During the trust's lifetime, there are two further potential charges that may arise: 

• Ten-year anniversary charge. Every ten years from the date the trust was established, HMRC may levy a charge of up to 6% on the value of trust assets exceeding the nil-rate band.
• Exit charge. When assets leave the trust (for example, when distributed to a beneficiary), a proportionate charge of up to 6% may apply.  This is calculated by reference to the time elapsed since the last ten-year anniversary.

For individuals who own qualifying agricultural or business assets, the new trust allowance of £2 million can be applied against any ten-year anniversary charges or exit charges to reduce the ongoing inheritance tax liability.  Broadly, the first £2 million of qualifying assets will benefit from 100% relief with any assets in excess of this value entitled to 50% relief.  

For business owners looking to protect family companies from fragmentation, the capped relief applied in conjunction with a trust may offer a tax-efficient means of keeping the family business intact. 

HMRC has significantly expanded the scope of trusts now required to register on the Trust Registration Service, reflecting a broader push for transparency and compliance.  All taxable UK trusts and non-UK trusts holdings UK assets that generate taxable income or gains are required to register.

Trustees should be aware of the deadlines by which the trust must be reported, along with the ongoing reporting requirements.  Failure to register a trust can result in penalties.  Accurate registration is important to ensure the trust operates smoothly when it comes to tax returns, asset sales, or distributions.

For families seeking to preserve and transfer wealth across generations, trusts – when properly structured and professionally advised – remain a powerful tool available in estate planning.  However, it is important to understand the tax implications of trusts and factor ongoing reporting requirements into the decision-making process.