HMRC have published a response to their 2018 consultation ‘The Taxation of Trusts: a review’ which considered if the system for taxing trusts meets the principles of transparency, fairness, neutrality, and simplicity. The conclusion is that no comprehensive reform is currently required.
In the consultation the government did not suggest any specific reforms and instead sought views and evidence on various aspects of trust taxation. The respondents expressed the views that:
- Trusts have disproportionately onerous disclosure requirements and their tax rules are less generous compared to those for individuals.
- There was support for measures that make it more difficult to hide who controls or benefits from trust assets where the trusts are being used for illicit purposes, such as the use of public beneficial ownership registers.
- Many felt it would be beneficial if the Making Tax Digital rules could be made to work more effectively for trusts.
- Transparency, fairness and simplicity are reasonable principles to apply to the taxation of trusts though some complexity is unavoidable. As trusts can exist for many generations the principles of consistency, certainty and stability should also be given due weight. Due to the many different types of trust a ‘one size fits all’ approach will not work.
- A better starting point is to look at what purpose trusts serve, how they are used in practice and how the tax system can support this. They are often the most suitable legal method for passing on or managing and protecting wealth and assets, but the current tax rules can deter people from using them for legitimate purposes.
- Key areas for reform are Inheritance Tax (IHT) and Income Tax:
- The IHT entry charge was criticised, as well as the ten-year charge, which can produce double tax charges e.g. where the Gift with reservation of benefit rules apply.
- Most agreed that the 6% rate for ten year and exit charges was fair.
- The rules for Private Residence Relief for trust assets, income and capital receipts and trust management expenses are fair and do not require reform.
- The rules on trusts for vulnerable beneficiaries are overly complex which can produce unfair results.
- There were concerns that defining a trust's residency by that of its trustees can lead to the accidental migration of trusts to and from the UK, discouraging non-resident settlors from using UK resident trustees.
- Some respondents from outside the tax and trust professions felt trust laws in some overseas jurisdictions facilitated avoidance and evasion. Those within the professions felt anti-money laundering and professional conduct rules have resulted in firms not getting involved in avoidance through non-UK trusts.
Since the responses received did not indicate any need or desire for extensive changes to the taxation of trusts, the government proposes to keep the matter under review and only consider reform to specific areas on a case by case basis.
Useful guides on this topic
When is a trust non-resident? What are the UK tax implications of a non-resident trust? What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?
Trusts & Tax planning
What is a trust? How can trusts be used in tax planning? What the advantages and what are the pitfalls?