In November 2018 HMRC published some research they commissioned from Ipsos MORI.
The research explored the use of trusts and took responses from settlors as well as professional advisers or “agents” who help settlors establish trusts.
The aim appears to have been to gain an understanding of settlors’ motives in establishing trusts and the extent to which tax planning influences or drives behaviours.
Presumably this research was commissioned in anticipation of the current consultation into the taxation of trusts.
The research makes an interesting read as it appears to show some disparity between the settlors and their agents in respect the tax effectiveness of the use of trusts.
Whilst some of the settlors’ responses suggest that mitigating Inheritance Tax was indeed a motivation behind establishing a trust the agents perspectives seem to view the tax effectiveness in the context of other Inheritance Planning options, such as outright gifts (PETs). That is to say, using a trust may not in-fact be as tax efficient as simply giving your money away.
This is an interesting point as it demonstrates the more fundamental “estate planning” benefits of trusts and challenges any perception of trust planning as purely tax motivated.
Indeed the report does cite the following as settlor’s main reasons for establishing trusts;
- Protecting assets from people
- Protecting assets from taxes
Although Inheritance Tax planning appears to be a motivation for the use of trusts this is clearly not the only reason. Protecting assets and being able to control their distribution amongst beneficiaries in the future are probably the key drivers, when an outright gift (to the children, grandchildren etc.) is a simple alternative.
When asked whether tax planning motivated a settlor into establishing a trust they may well say it did but this side steps the more fundamental factors influencing the settlors’ behaviours: a desire to protect and control the distribution of wealth and to protect their beneficiaries.