Taxation of trusts

The government has published its long awaited response to HMRC's 2018 consultation on the taxation of trusts.

The conclusion was that the responses did not indicate a desire for comprehensive reform of trusts at this stage. Instead, the government will keep the issues raised under review to ensure that its long-term approach meets its objectives and in the shorter term will continue to review specific areas of trust taxation on a case-by-case basis.

The response is perhaps unsurprising, as the original reasons for the consultation were unclear and unfocussed and the political and economic landscape has moved on. However, there are some missed opportunities for improvement. There is a clear need to reform vulnerable beneficiaries’ trusts, particularly at a time of great concern for mental health; a return of lifetime qualifying interest in possession trusts – an idea that HMRC had seemed receptive to – would have been logical; and the UK trust industry could have benefitted significantly from enabling UK professional trustees to run offshore trusts without those trusts becoming resident here.

HMRC’s response may indicate that there is no appetite for radical reform to trusts, or maybe they are leaving the door ajar for more fundamental inheritance tax (IHT) reform in future? The direction of travel remains far from clear but there has recently been much discussion and several papers advocating change on a broad range of aspects for both IHT in general and in relation to trusts.

This article first appeared in our Spring 2021 edition of our Private Client & Tax Newsletter.