Government seeks views on how trusts are taxed

HMRC has published a Review of the taxation of trusts. It seeks views on the principles which should underpin the taxation of trusts, and whether changes should be made where the current system does not align with these principles. 

This is a first stage consultation, looking at principles and seeking evidence. It does not make specific proposals for reform. There is a strong emphasis on tackling tax avoidance and evasion using offshore trusts, but HMRC also sets out a number of what it considers to be anomalies, inconsistencies or loopholes in the current rules for all types of trust. 

The starting point for the review is the three principles which the government considers should underpin trust taxation: transparency, fairness and simplicity. There is a chapter expanding on what is meant by each of these principles and the extent to which each applies in the current system. An appendix summarises the current trust tax framework. 

The government’s aims are to: 

  • address any remaining opportunities to use trusts, in particular non-resident trusts, for tax avoidance or evasion;
  • ensure that its approach to trust taxation does not result in unfair outcomes or other unintended consequences; and
  • facilitate the straightforward usage of trusts where they are the appropriate legal mechanism. 

It is welcome that the consultation notes that trusts are an intrinsic part of the UK’s legal system and have many legitimate and valuable uses, mentioning for example: holding charitable funds, managing funds for minors or vulnerable people, and holding family assets rather than fragmenting ownership. HMRC commissioned research on why people use trusts in order to inform this review and the report – Exploring the use of trusts – has been published. This research was based on one to one interviews with 40 agents and 20 settlors which took place between 6 October and 6 December 2016.

The three principles of trust taxation 

Transparency: this means that trusts should be sufficiently transparent that they cannot be used to hide the beneficial ownership of funds or assets from those responsible for administering the tax system or investigating criminal activity. The Common Reporting Standard and the Trust Registration Service go some way tackle this, but HMRC considers whether changes are needed to the law on trust residence. Evidence is invited on why a person would use a non-resident rather than UK-resident trust and how such trusts are used for tax avoidance and evasion. 

Fairness: the policy principle is that trust taxation should be neutral. Tax should neither encourage nor discourage the use of trusts and the rules should only deviate from this principle where there are clear policy reasons to do so. On this premise, the consultation looks at possible reforms to the inheritance tax regime for trusts, and also at matters such as private residence relief and trust management expenses. 

Simplicity: the principle is that trust taxation, and the accompanying administrative processes, should be sufficiently straightforward so that the tax system does not disincentivise the use of trusts, where their use is appropriate, and minimises the likelihood of error. There is discussion here about the complexity of the rules for Vulnerable Beneficiary Trusts. Evidence is invited on all other complex administrative requirements of the current system. 

Tell us what you think

There is a lot to consider in this consultation document, and the Tax Faculty would welcome comments from members. 

The closing date for responses is 30 January 2019 but please send your comments well in advance of that – contact