Another attack on trusts

Monday, 01 September 2014
It is difficult to see the UK government’s proposed ‘settlement nil-rate band’ as anything other than the latest assault on trusts, writes Martyn Gowar.

I apologise in advance, because I am about to rant again, against both the cynicism of the government machine, and another underhanded attack on the use of trusts as a really useful method of transferring wealth to the next generation. Without boring you too much with history you already know, I will try and remind you of the context in which the current situation came about. 

How we got here

In 2006, the then UK government made the creation of trusts (with very limited exceptions) liable to a tax charge of 20 per cent on the value in excess of the available nil-rate band. The ministerial justification was that outright gifts that gave control of the donated assets to the donee were fine, but that absence of control by the donee was to be penalised. I pause to remind you that the government had instituted research the results of which confirmed what we, as advisors, well knew: that trusts were not set up primarily for tax-avoidance purposes, but for family reasons. As a result of the Finance Act 2006, the use of trust giving came to an abrupt halt,1and it has barely bounced back because, hardly surprisingly, people do not pay tax voluntarily. 

An unforeseen consequence of taxing all new trusts as discretionary trusts has now come to light: the calculation of the ten-yearly ongoing charge to tax requires the availability of information about the past financial affairs of donors that did not need to be retained at the time trusts were set up under the pre-2006 regime.2 So, a consultation took place on ‘simplifying’ the calculation for the future, but we were assured that this was not intended to be a way of generating additional tax. The responses to that consultation seem, depressingly but not unusually, to have been ignored. The government has now announced that, for the purpose of simplification, it is going to suggest a single ‘settlement nil-rate band’ (SNRB) that the settlor can allocate among their lifetime and testate settlements. That is a lifetime allowance, not a seven-year allowance. 

Have the Chancellor and his ministers really considered this marginal proposal and its impact?

The wrong answer

I can see that, under the current rules, there is a justifiable issue in that each settlement can have its own nil-rate band, and that this could lead to a loss of revenue. But that does not require the penalising of all gifts to trusts. Even Gordon Brown in 2006 did not say that potentially exempt transfers were to be curbed, and an outright gift still falls out of account after survival of the donor for seven years. Now, if a donor sets up a trust and allocates the whole of their SNRB to that trust, any further trust will have a 20 per cent initial charge on the whole of its value, even though a series of outright gifts would not bear tax initially. 

What does this say except that the government is discouraging the use of trusts? Trusts are going to be more heavily taxed, both on creation and on the decennial charges if tax rates are not reduced, because there will be less nil-rate band available. 

Have the Chancellor and his ministers really considered this marginal proposal and its impact? While we have been disappointed, if not surprised, that no review of the 2006 nonsense has taken place under the coalition, we did not expect the government to entrench the position. There are simpler ways of dealing with the practical problem that the calculation of tax involves, and ministers should direct their officials to look at them again. 


  • 1. ‘UK trusts – taxed to death?’ by George Hodgson, available at 
  • 2. For some worked examples, see ‘Tax tips for trusts turning ten’ by Robert Jamieson, STEP Journal, vol 22, issue 6
Author block
Martyn Gowar

Martyn Gowar TEP is a Partner at McDermott Will & Emery UK LLP and an Editor of the STEP Journal.

The content displayed here is subject to our disclaimer. Read more