Wedlake Bell responds to Government’s Trusts Consultation

14 / 03 / 2019

On 9 November 2018, following a commitment in the Autumn Budget 2017, HM Revenue and Customs published “The Taxation of Trusts: A Review“, a consultation paper looking at how trusts are taxed in England and Wales and discussing how this could be made simpler, fairer and more transparent.

Trusts have been used for centuries in England and Wales to hold wealth and separate the ownership of assets between the legal title (held by trustees) and the beneficial interest (to which the beneficiaries of a trust are entitled), and have a wide variety of legitimate and valuable uses ranging from protecting assets for the benefit of younger and/ or vulnerable beneficiaries, holding assets for charitable causes and managing family assets for future generations of a family to avoid fragmentation, claims and/ or mismanagement. However, in recent years with government reforms, the tax cost of setting up and running a trust has increased and the different tax regimes to which different types of trust can be subject can be extremely complicated. For example, in general, there is an inheritance tax charge at the rate of 20% when a trust is set up and ongoing ten yearly charges to inheritance tax at a maximum rate of 6%. HM Revenue & Customs has recently reported that the number of trusts and estates filing a tax return fell to 156,500 for the tax year 2016-17 – a decrease of about 30 per cent in thirteen years, and the heavy tax charges that trusts now face is generally agreed to be a significant factor in this apparent decline.

The consultation is also aimed at exploring whether trusts should be more transparent in terms of the identity of their beneficial owners and controllers to ensure that they cannot be used to facilitate tax avoidance or evasion.

Wedlake Bell’s Private Client team have a long history of setting up, advising on and administering trusts and have responded to the consultation to represent the interests of their clients. The full response can be viewed here. A summary of the main points made in the response is set out below.

  • The existing UK legislation goes far enough in respect of trust transparency. Caution is needed in extending this still further at the expense of privacy and personal safety.
  • The 20% inheritance tax (“IHT”) lifetime chargeable transfer charge is not tax neutral when compared with outright transfers of assets.
  • It is not fair or neutral for Will trusts to suffer a 40% IHT charge at commencement followed by further IHT charges every ten years.
  • The IHT treatment of interest in possession trusts should be reassessed and simplified, if possible into a single regime across all lifetime and Will interest in possession trusts.
  • We disagree that capital gains tax private residence relief in the context of trusts produces a non-neutral outcome and requires assessment.
  • The current ability for trustees to deduct trust management expenses is justified particularly in view of trustees’ higher rates of income tax and lack of personal allowance.
  • The IHT qualifying conditions for bereaved minors’ trusts should be more flexible to allow more children to benefit without needing to become entitled to assets at age 18.
  • The qualifying conditions for disabled person’s trusts should also be reassessed from a flexibility perspective to encourage more parents to set up such trusts for a disabled child.
  • The IHT residence nil-rate band regime is unnecessarily complex, discriminatory and requires review so that more people can understand and benefit from the regime.

The consultation period ran to 28 February 2019 and HMRC are now reviewing the responses. We await with interest what proposals for reform might be put forward and hope that the trusts regime will ultimately be simpler and fairer for clients as a result.