On 7 November, after a long wait since its coming was announced in the Autumn Budget of 2017, the consultation “The Taxation of Trusts: A review” was published. The consultation has the overriding objective of seeking to make the taxation of trusts simpler, fairer and more transparent. Suffice to say that the initial impression is that there is probably little for financial planners to overly worry about.
So, let’s have a look at what the consultation says against each of the stated broad objectives.
Against the Simplicity test HMRC focus very much on simplifying the approach to taxation for Vulnerable Beneficiary Trusts and touch on some other aspects of trust taxation that might warrant simplification. The “possible issues” are set out below.
In the case of trusts known collectively as “Vulnerable Beneficiary Trusts” (trusts for beneficiaries with a disability or for bereaved minors), the Government is aware that stakeholders have previously expressed concerns that the complexity of income tax and capital gains tax rules limits the use of the available tax reliefs by those who should benefit. There are also concerns about the effectiveness of the income tax relief, given that the tax pool mechanism can lead to a secondary charge.
The Government is committed to taking action to simplify the treatment of these trusts and to ensure the effectiveness of reliefs. At this stage, the Government say they would welcome views on the tax treatments that these trusts receive, alongside their interaction with “age 18 to 25” trusts (a continuation of bereaved minor trusts used in some circumstances).
In parallel, the Government is interested in views and evidence on other drivers of excessive complexity in the trust taxation system.
For example, they recognise that one key determinant of the complexity of the present trust taxation system is the need for trustees to liaise with the settlor or beneficiaries (as the case may be) to ensure that all parties pay the correct amount of tax, rather than there being a standalone or simplified regime either for all trusts, or for those trusts whose settlors or trustees would welcome a reduction in administrative burdens.
That said, the Government recognises that taking a different approach would constitute a fundamental change to trust taxation policy, and would only be warranted if it constituted a significant improvement in comparison to the current rules.
Finally, the Government is interested in views and evidence on all other complex administrative aspects of the trust taxation system. For example:
- The Government is aware that for many small trusts, income tax administrative requirements can seem unduly onerous, especially where the tax due is low.
- Recent Ipsos MORI research demonstrates that the cost of employing an agent to calculate the inheritance tax (IHT) periodic charges for a trust can outweigh the cost of the tax itself.
In relation to Transparency the main reference is to the actions already resulting from the OECD Common Reporting Standards (CRS) and the implementation of the Money Laundering, Terrorist Regulations. The new (and, it seems, to be expanded) trust registration provisions will be known to all with more than a passing interest in trusts.
Also, in relation to Transparency, strong focus is given to the use of offshore trusts by UK residents.
On Fairness and Neutrality, the spotlight falls predominantly on the trust IHT charges - in particular, the combined impact of entry, periodic and exit charges and whether they operate fairly and efficiently compared with the IHT outcome of an ordinary gift to an individual or individuals.
Among the additional topics picked up on for consideration is the application of the private residence exemption for residential property held in trust, trust management expenses and the impact of determining whether a receipt is an income receipt or a capital receipt.
The consultation is being conducted in line with the Tax Consultation Framework.
There are five stages to tax policy development:
Stage 1 - Setting out objectives and identifying options;
Stage 2 - Determining the best option and developing a framework for implementation including detailed policy design;
Stage 3 - Drafting legislation to effect the proposed change;
Stage 4 - Implementing and monitoring the change;
Stage 5 - Reviewing and evaluating the change.
This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the policy design and any suitable possible alternatives, before consulting later, on a specific proposal for reform.
Responses are required by 30 January 2019:
- by e-mail to: email@example.com; or
- in writing to: Trusts Tax Reforms Consultation Assets and Residence Team, 100 Parliament Street, London SW1A 2BQ.
Following the consultation period, the Government will publish a response document which will indicate whether they are minded to propose any specific changes based on the suggestions received. If so, there will be further consultations on detailed proposals at that point.
Please note that this document was prepared by a third party and as such Brewin Dolphin is not responsible for the content or able to answer queries on the topics dealt with. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Therefore you should not rely on this information without seeking professional advice from a qualified tax adviser, who should also be able to assist you with any questions on the content.
This document was prepared as a general guide only and does not constitute tax or legal advice.