Budget tax changes could trigger decline in trusts

The upcoming Budget could lead to a sharp decrease in the creation of new trusts, warns Eugenia Campbell, private client director at RSM UK. (Source FT Adviser)

In a blog post, Campbell discussed how rumours of restrictions on business relief and agricultural relief could affect the playing field for trusts going forward.

She noted, “During the last Labour government, Gordon Brown, as chancellor, introduced significant changes to the taxation of UK trusts in 2006.

“Since then, the number of trusts filing self-assessment tax returns has decreased from 210,000 in the 2005-06 tax year to 141,500 in the 2021-22 tax year, a decline of nearly one-third.”

Campbell further explained that recent IHT statistics suggest the actual tax paid due to trust IHT charges may be lower than expected based on headline rates.

“For instance, in the 2021-22 tax year, HMRC’s latest estimates indicate that only 48 chargeable events, with a combined value of £42 million, were subject to entry charges. These entry charges generated just £2 million in IHT, resulting in an effective entry charge rate of less than 5 percent.

“Total IHT receipts from trusts in the 2021-22 tax year are estimated at only £52 million, with the majority – £42 million – coming from 10-year charges.

“Overall, the IHT receipts from trusts account for less than one percent of the nearly £6 billion in IHT liabilities for that year, a mere drop in the ocean compared to the IHT assessed on deaths,” she explained.

Campbell suggested that the declining number of trusts may reflect a lack of understanding among taxpayers about how they operate.

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