Government considers reform of taxation of trusts

HMRC has published a 12-week consultation reviewing the taxation of trusts to determine how its tax policy can be made more transparent as well as whether reform is needed to encourage uptake but discourage the abuse of non-resident trusts for tax avoidance purposes

The government has not made any specific proposals for reform of the taxation of trusts but will consider the views and evidence presented in response to the consultation and will then weigh up the options for reforms accordingly.

The government is concerned about the abuse of non-resident trusts for possible tax avoidance purposes and money laundering. In response to this the government wants to address any remaining opportunities to use trusts for tax avoidance or evasion, ensure that the current taxation of trusts does not result in unfair outcomes or other unintended consequences and enable the straightforward usage of trusts where they are the appropriate legal mechanism.

The UK’s National Risk Assessment of Money Laundering and Terrorist Financing said: ‘The risk of criminals exploiting UK trusts to launder money is assessed to be low. However, there are significantly higher risks associated with overseas trusts.’

The government said: ‘It is relatively straightforward for UK resident individuals to set up non-resident trusts for Income Tax and Capital Gains Tax purposes. Although such trusts will in general still be liable for UK tax on UK source income and gains on certain UK land.’

In recent years the government has introduced a number of anti-avoidance measures to tax UK resident and domiciled settlors on worldwide trust income and gains. For example the income of a settlor-interested trust (one where the settlor retains some ability to benefit) is generally attributed to the settlor in the same amount as would have been the case if the settlor owned the property outright.

Payments from a trust to a settlor’s dependent minor children are taxed as the settlor’s income in the same amount as would have been the case if the settlor owned the property outright.

If an individual sets up multiple ‘pilot trusts’, they do not thereby receive multiple Inheritance Tax nil-rate bands when property is then settled to those trusts on a later day.

There is also the Trust Registration Service and online register of beneficial ownership of trusts which was introduced in July 2017. The Money Laundering Regulations also impose a legislative obligation on trustees of UK resident express trusts and non-UK express trusts that generate a UK tax consequence to hold written, accurate and up-to-date records of their beneficial owners and to make these available to UK law enforcement authorities on request.

Mark Cawthron, senior tax writer at Croner-i, said: ‘Some of the principles around ‘consideration’, for stamp duty purposes, are undoubtedly arcane - so reform is, arguably, entirely appropriate. But a new ‘money’s worth’ criterion (itself a somewhat difficult term) for stamp duty, as mooted, will certainly create difficulties in calculating the stamp tax charge on plenty of private company share transactions. To be fair, the consultation document seems to anticipate this.’

The 28-page consultation is intended to:

  • set out the government’s principles for taxing trusts, and seek views on those principles;
  • assess the extent to which the current trust taxation system aligns successfully with those principles; and
  • seek views and evidence on the case for and against reforms to address any areas of trust taxation which do not currently align with those principles.

The three policy principles which are used by the government to test the efficiency of the taxation of trusts are transparency, fairness and neutrality and simplicity.

Trusts must be transparent so that they cannot be used to hide the beneficial ownership of funds or assets and non-resident trusts should be transparent to ensure that such trusts do not offer the opportunity to avoid or evade UK tax liabilities. Trust taxation should also be neutral and simple as to not discourage their use.

The government is seeking views on whether these principles constitute a reasonable approach to ensure an effective trust taxation system or whether the system needs reform.

Simon Rylatt, partner at Boodle Hatfield, said: 'It is in some ways surprising to see such a wide-ranging review given that, over the last couple of decades, many historic tax reliefs associated with trusts have been legislated away.

'Similarly, recent reforms in the UK now mean that there is a high level of transparency regarding trusts, certainly when looked at from a global perspective. Care does need to be taken not to introduce reforms that could unduly dissuade individuals from using trusts because they have an important role to play in a number of everyday situations, for example in looking after money for minor children.'

The closing date for comments is 30 January 2019.

The Taxation of Trusts: A Review is here. 

Report by Amy Austin

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