Recent data suggests that formation of trusts is falling, or at least decelerating. What's the cause of this, and what are the implications to draw? This article - the first of three in a series - delves into the details.

This is the first part of a three-part series from Hugh James, the law firm. The first part of this series from the firm’s private client law firm is by Alix Langrognat, a partner in estates planning, based in London.

Trusts have long been a cornerstone of estate planning strategies. Yet, recent statistics from the Trust Registration Service (TRS) hint at a changing tide, with a noted decline in new trust creations. In this article, the author goes beyond the numbers to reveal a nuanced narrative, one that underscores the enduring significance of trusts in modern estate planning. Critics often highlight a declining trend in new trust creation, and recent statistics up to October 2023 from the Trust Registration Service (TRS) support this view. By March 31, 2023, there were 633,000 registered trusts and estates, with a 3 per cent fall in self-assessment returns filed in 2023 compared to the previous tax year. 

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The current landscape
Let’s briefly examine some trust trends from a tax and legal standpoint looking at the TRS statistics:

--  Capital Gains Tax (CGT) payments surged by 27 per cent in the tax year ending 2022 (compared with the previous year); 
--  Interest in possession trusts continued to decline; and  
--  In the tax year ending 2022, approximately 82,000 trusts paid income tax at special rates. Among these, 32,000 had incomes less than £1,000 ($1,252), 46,500 had an income ranging from £1,000 to £100,000, and 3,500 generated incomes exceeding £100,000.

While these statistics demonstrate the ongoing focus on trust taxation, it overlooks how practical trusts can be when planning for clients. 

The benefits of a trust 
Key reasons why trusts are valuable planning tools:

Flexibility – many clients are not sure how they want to benefit their family members, close friends or charities. Guiding your trustees with a detailed letter of wishes is often an attractive prospect. Flexibility is also beneficial in urgent situations, allowing for the creation of “stop-gap” or emergency wills.

Inheritance tax mitigation – with the 40 per cent IHT rate (subject to the availability of certain reliefs), transferring assets into a trust still presents an attractive strategy. Business owners may opt to carve out business assets in their will or during their lifetime, using Business Relief to reduce or mitigate immediate IHT charges.

Protection of vulnerable beneficiaries – trusts offer a safeguarding mechanism for individuals unable to manage their financial affairs due to poor health or other vulnerabilities. Establishing protective measures, particularly on death, offers peace of mind for many clients, whether the trust is managed by family members or professional trustees.

Divorce – can be a concern for certain testators, particularly regarding the spouses of their children or other family members. To address this, they often opt for a trust ensuring that no beneficiary has a specific share (as seen in a discretionary trust). Additionally, they may guide their trustees to consider the circumstances of their children before making significant distributions (more to come on this in our second article of the series).
 
Types of trusts
The most commonly used trusts include:
-- Interest in possession – grants beneficiaries immediate rights to trust income or to have the use and enjoyment of the trust assets. This is commonly known as a life interest trust, where the principal beneficiary receives income or occupies a property and is called the life tenant. Often established through wills, these trusts provide beneficiaries with post-death interests or lifetime income rights, for example, a grandparent setting up a trust to pay school fees for grandchildren. 
-- Discretionary trusts – offer trustees the discretion to decide who among the beneficiaries receives distributions and whether it is income or capital, guided by the settlor’s letter of wishes. This could include loans, occupation of a property or custody of a physical object, such as a work of art.  
-- Excluded property trusts – offered to non-UK domiciled individuals or those with deemed domicile status, providing opportunities to safeguard assets offshore and mitigate IHT. It is worth noting that the recent [UK] Budget announcements affect the non dom regime from 6 April 2025, meaning options that existed in the past will be affected and advice should be sought if you are a non-domiciled UK resident.

Key takeaways
-- Trusts remain relevant, offering flexibility in providing income and capital for beneficiaries; 
-- They serve as effective tools for asset protection, especially for vulnerable individuals or in divorce or bankruptcy scenarios; 
-- Despite declining numbers, there are still ample planning opportunities with trusts; and
-- Hugh James provides trust corporation services, offering support for existing or newly created trusts.

Trusts intersect with other areas of legal expertise including family law and litigation. 

In this series, Victoria Cannon, partner and head of family law and Roman Kubiak, partner and head of private wealth disputes at Hugh James, will later examine the resilience of trusts in family proceedings and explore scenarios involving trust challenges and disputes.