Skip to content

Consultation on the taxation of trusts and what you need to know

On 7 November, HMRC published the long awaited consultation on trust taxation, announced over a year ago. It was not clear at the time of the original announcement which taxes would be in scope for this review but it is now confirmed that HMRC are looking across the board at income and capital gains tax as well as 'targeted reform to the inheritance tax regime'. However, there are no specific proposals for change; instead, this is a high level document exploring the general principles that should underpin the taxation of trusts and highlighting some areas they might address.

The key principles suggested are transparency, fairness and simplicity. These sound like a good starting point, but are not new. We had three successive consultations in 2012, 2013 and 2014 on 'simplification' and 'fairer' IHT treatment of trusts. The current consultation could resurrect the idea of a shared settlement nil rate band as it suggests that placing this amount into trust every seven years 'can be seen as a means of obtaining additional nil rate bands'.

However, the overall tenet is 'ensuring tax considerations neither incentivise nor dis-incentivise the use of trusts.' We hope that this might cause the government to reverse some of the 2006 changes which introduced a significant disincentive in the form of an immediate 20% IHT charge for all new additions to trusts above the nil rate band. The fact that trustees pay the highest rates of income and capital gains tax is a further disincentive to place assets into trust compared to outright ownership. But whether any alignment of individual and trustee tax rates will be forthcoming remains to be seen as this will be a revenue cost for HMRC.

In the context of transparency, it is stated that trusts should be sufficiently transparent that the beneficial ownership of funds or assets is not hidden. This is largely uncontroversial in terms of giving government authorities access to information, but the consultation asks if transparency can be enhanced any further. Given the significant increase in compliance over the last few years, both in the UK and worldwide (with FATCA, CRS and TRS for example and with 5MLD on the horizon), it is difficult to see how much more transparent trusts could become before legitimate rights to privacy are completely eroded.

Despite the general nature of the consultation, views are sought on:

  • The current regime for taxing Will trusts. This is surely ripe for review: the regime for those who choose (as most do) to leave assets to children at 25 rather than 18 makes little sense to most clients, let alone a different regime for gifts to grandchildren and other minors.
  • Whether it is fair to allow trustees to claim main residence relief on a property occupied by a beneficiary? It is not clear what 'mischief' the government has in mind here but it would seem unfair to deny the relief to trustees.
  • Whether the trustees' ability to deduct trust management expenses is more generous than for individuals whose costs of managing their own affairs are not tax deductible? This overlooks the trustees' more formal fiduciary duties to account to their beneficiaries and their more complex tax affairs that often require professional involvement.

We will be responding to the consultation before it closes on 30 January 2019. The Government will then decide whether to consult further on any reforms based on the suggestions received, assuming that they will have the time and resources to take matters forward. Any radical change seems unlikely to proceed with any speed.

December 2018

How to find us:
London Bankside

Bankside Office

240 Blackfriars Road
London
SE1 8NW
DX 53 Chancery Lane

Telephone: +44 (0)20 7629 7411
Fax: +44 (0)20 7629 2621
Email: bh@boodlehatfield.com

London Mayfair

Mayfair Office

6 Grosvenor Street
London
W1K 4PZ

Telephone: +44 (0)20 7629 7411
Fax: +44 (0)20 7629 2621
Email: bh@boodlehatfield.com

Oxford

Oxford Office

6 Worcester Street
Oxford
OX1 2BX

Telephone: +44 (0)20 7629 7411
Fax: +44 (0)20 7629 2621
Email: bh@boodlehatfield.com

Bankside Office

240 Blackfriars Road
London
SE1 8NW
DX 53 Chancery Lane

Telephone: +44 (0)20 7629 7411
Fax: +44 (0)20 7629 2621
Email: bh@boodlehatfield.com

Get directions

Contact us