For all the changes and setbacks, trusts will, the author says, remain an "essential tool" for cross-jurisdictional estate planning.

The following article from David Barker (pictured), a senior UK wealth planner at Lombard Odier, examines changes in trust law in the UK, and the changes following last October’s Budget from the new government. The editors are pleased to share such thoughts on these important topics. Wealth protection and safety in transfer are important subjects and, of course, we invite readers to respond. The usual editorial disclaimers apply. Email  tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

The “trusted friend” is the trust. The question is posed because some of the inheritance tax (IHT) changes announced in the UK budget on 30 October 2024 are likely to deter UK residents seeking to establish lifetime trusts as part of their inter-generational succession planning and disadvantage some of those who had already taken that step. 

Origins of the trust
Trust law supposedly had its beginnings in 12th century England. Crusaders leaving for war overseas often transferred their land and estate to someone else to manage while they were away, with the expectation that ownership would be restored on their return. In most cases this happened. But English law, based on Roman law, recognised the rights of only the legal owner and disputes occasionally arose in which the owner refused to hand back the estate. Since there was no valid claim in law, the only recourse was to petition the King. Justice was often delivered by the Lord Chancellor recognising the knight’s right in equity, with the owner considered to have held the property as trustee. 

Trust law in England and Wales developed from these origins and became a sophisticated part of the legal system. Inevitably, it then spread to other parts of the world which fell under Britain’s administrative influence. Many countries now have their own codes of trust law, including the US, South Africa, Australia, Canada, New Zealand, Jersey, Guernsey, the Cayman Islands, Bermuda and the BVI. 

The 2006 changes
In the Finance Act 1986, the UK IHT rules adopted the concept of the Potentially Exempt Transfer (PET). A PET is a gift from one individual to another, and (subject to anti-avoidance provisions); it is not subject to IHT if the donor survives for seven years after making the gift.

Until 2006, a gift to a trust in which an individual had an interest in possession (a right to the income) or to a trust for minors who would acquire the trust property (or an interest in possession in it) by an age not exceeding 25 (an Accumulation and Maintenance trust) was also treated as a PET. 

The 2006 Finance Act turned this treatment on its head. Lifetime transfers on or after 22 March 2006 to most trusts (with special exceptions) have been chargeable lifetime transfers, not PETs, and the trust itself has been subject to the “relevant property regime.” Put simplistically, a lifetime IHT charge at a rate of 20 per cent applies to a transfer to a trust subject to the relevant property regime (which may increase to a rate up to 40 per cent if the settlor dies within seven years) and the trust is subject to IHT at a rate of 6 per cent every 10 years, and to a proportionate charge on property leaving the trust.

Consequences of the 2006 changes
This change led to a substantial reduction in the creation of lifetime trusts by UK domiciled individuals. It is probably accurate to say that interest in alternative succession planning arrangements, which could be funded with PETs but offer an element of reserved control, such as family investment companies and family limited partnerships, can be traced to this.

Lifetime trusts have remained popular with UK residents in two circumstances in particular:

1. Where assets settled on trust qualified for relief from IHT, typically relief for business property such as shares in trading companies, so that the lifetime 20 per cent IHT charge would not be payable. For instance, an entrepreneur approaching a liquidity event wishing to share wealth across the family but prevent its dissipation might choose to settle shares in the family trading company on trust for other family members.

2. Where the settlor of the trust was not domiciled in the UK (and not deemed domiciled) and the assets settled on trust are foreign property and therefore exempt from IHT altogether, as “excluded property.” Under current tax law, the foreign assets of trusts created by such a settlor are permanently outside the scope of IHT.

Both opportunities have been eclipsed by the changes announced in the October 2024 budget.

The October 2024 budget changes
The Government unexpectedly announced the curtailment of the IHT reliefs for agricultural and business property. These reliefs, with rare exceptions, currently shelter 100 per cent of the value of qualifying property. From 6 April 2026, IHT relief for the combined value of business and agricultural assets will be capped at a threshold of £1 million ($15.5 million) per individual, with the balance attracting relief at only 50 per cent. There are also “anti-forestalling” provisions so that if qualifying assets are settled on trust after the budget but before 6 April 2026 to “bank” the current unrestricted 100 per cent relief, the relief will be retrospectively recalculated to the new reduced rate if the settlor dies after 5 April 2026 but within seven years of the transfer. Some of the finer detail is the subject of an ongoing HMRC consultation.

From 6 April 2025, the foreign assets of trusts with non-domiciled settlors (including trusts set up before the October 2024 budget) will generally no longer be exempt from IHT as “excluded property.” The IHT status of the trust will instead track the tax profile of the settlor. If the settlor is a “long-term resident” (“LTR” – UK resident in at least 10 of the previous 20 tax years), the trust’s assets will be subject to IHT under the relevant property regime. If the settlor ceases UK residence and (after the end of the new “IHT tail” of between three- and 10-years post-departure) loses LTR status, the trust will then fall outside the scope of IHT on its foreign assets. The long-term status of the trust will be determined by the settlor’s status (LTR or not) on death. Transitional provisions may apply to some trusts where a beneficiary held a right to trust income prior to the budget.

Key points to consider
It is important that trustees and families work closely with their advisors to find solutions to some of the key issues:

-    With the reduction in business and agricultural reliefs, are there opportunities for effective trust planning before the 6 April 2026 commencement date for those confident of seven-year survival? 
-    Where trusts hold business and agricultural assets but have little liquidity (a common scenario) how will the funds be raised to pay the IHT?
-    How will your trust’s IHT status be affected by the fundamental non-domicile changes? We are seeing an assortment of reactions, with trusts being terminated, varied or retained due to their overriding succession planning value to the family. In some cases, settlors are leaving the UK to avoid the changes or mitigate their effect.

Returning to the question in the title, the answer is “to many places, but probably not the UK, save for specific circumstances.” The benefits of the trust as a flexible succession planning vehicle are widely recognised by an increasing number of international families across the globe. Trusts will remain an essential tool in cross-jurisdictional estate planning and provide families with a way to safeguard wealth and share it across generations, maybe for centuries to come.