HMRC statistics: fewer taxable trusts, gradual fall continues

Recent statistics published by HMRC demonstrate a fall in the number of trusts paying UK tax.

• The number of trusts and estates that filed self-assessment tax returns fell by 6% in the 2020/21 tax year compared to the 2019/20 tax year. HMRC notes that this reflects a longer-term trend, which has seen the total number of trusts and estates filing UK tax returns reduce by 14% since the 2015/16 tax year.
• 31,000 trusts have been registered with the Trust Registration Service (TRS) so far (up to 31 March) in 2022. This represents a 23% increase from the previous year. Of the 31,000 registered, just over half (17,000) were non-taxable. 
• HMRC acknowledge that this statistic is driven by the recent expansion of the TRS, meaning that nearly all UK trusts must register regardless of whether or not they have a UK tax liability. UK bare trusts and nominee arrangements – which are generally tax transparent – must therefore be registered in most cases. This means that whilst the number of taxable trusts has fallen, HMRC has greater oversight of non-taxable trusts.

The general decline in taxable trusts could indicate that UK resident and domiciled individuals are more reluctant than previously to use trusts. This could be an effect of the longer-term trend initiated by the major changes to the taxation of trusts in 2006, which resulted in the majority of UK trusts created during lifetime becoming taxable under the inheritance tax "relevant property regime" (which imposes ten yearly charges on trust assets, as well as other charges on certain events during a trust’s lifetime). This has meant that certain trust structures (for example, life interest trusts created other than by will) are no longer as tax efficient as they once were and are perhaps less attractive as a result.

Given the recent increase in reporting requirements (such as the TRS), which have seen the trustees of UK trusts incur time and expense to ensure that their trust remains compliant, it may be that, in certain circumstances, individuals are finding that the succession benefits offered by trusts no longer justify the costs and administrative burden of managing a trust.

Although the number of taxable trusts has fallen, HMRC has in fact received more tax revenue from trusts (and estates) during the period. The total UK income tax and capital gains tax generated by this category was £1,455m in the 2020/21 tax year. This represents an increase of roughly 5% from 2019/20. Overall, this is due to a rise in capital gains tax receipts (whereas the amount of income tax generated by most types of trust fell). HMRC acknowledges that capital gains tax data is relatively volatile, so we shouldn’t ascribe a general trend to these statistics. The rise in capital gains tax receipts during 2020/21 may well be due to wider factors, such as policy changes affecting Business Asset Disposal Relief (discussed in our previous article). 

Time will tell whether the fall in the number of taxable trusts continues; however, although trusts may not be appropriate for all situations, it is interesting that as of 31 March 2022, there were still 198,000 trusts (and estates) registered with the TRS, which is not an insignificant number. Crucially, trusts can still serve a very useful purpose, particularly when it comes to estate planning: for example, providing an income stream for a spouse on their partner’s death, or protecting beneficiaries from exposure to assets before they are ready to deal with them.