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Taxation of Trusts consultation

Do you have an interest in trusts and how they are taxed? Are you conscious of problems that need changing or would you just like to reflect on what you see as important in the system?

The government is consulting on the taxation of trusts, with a main agenda of transparency – are trusts set up in order to conceal real ownership of assets rather than simply protect them?

Irwin Mitchell Private Wealth is keen to elicit further expert views on this, especially now that the deadline for responses has been extended from January 30 (when it clashed with the tax deadline) to the end of February.

HMRC’s Taxation of Trusts Review asks some challenging questions and raises controversial issues for response. It seeks to be a ‘green paper’ opening up the subject for wide debate. There are nine questions raised in the consultation, and given the tone of HMRC comments some response is really needed.

Capital Gains Tax main residence relief

Some of the points made are frustrating, as they don’t appear to be based on a proper understanding – such as questioning whether a trust should benefit from the Capital Gains Tax (CGT) main residence (PPR) relief.

If a trust owns a property (or a share of a house) occupied by a second spouse, and after that spouse’s lifetime the house (or the trust share) goes to the children of a first marriage, why should the trust not benefit from PPR relief if the house is sold? The report says “this can result in an outcome that is not neutral” which is an unfair conclusion.

Proper use of Trusts

There is some real suspicion of trusts on show, with their alleged role in concealing true beneficial ownership, brought on by the public concerns about the Panama papers. HMRC staff have, in recent meetings with representatives of professional bodies, suggested the paper does have a proper balance as they are balancing the perception of abuse with the genuine, proper uses of trusts which are recognised in the document. It all depends upon your starting point!

We should stand up for the proper, mainstream uses of trusts for many good personal, family and legal reasons, which are not as fully identified as they might be. In chapter 3 on “Trust usage and policy principles”, 3.4 sets out some different uses of trusts, but there are many more. Do check whether your main uses are listed.

Three examples of classic uses completely omitted are:

  • Flexibility – to be able to benefit different members of a family as needs change over time
  • Asset protection - to stop assets being wasted e.g. by someone who can’t handle large sums of money
  • Benefiting different beneficiaries at different times – e.g. the typical second marriage, or helping one child at university, then another.

The consultation raises fundamental questions about what we want from trusts, setting out three key principles of transparency, fairness and neutrality, and seeks feedback on whether these are the right principles and how you can balance fairness and neutrality when they can lead to different outcomes.

Taxation of Trusts

There is a danger that HMRC sees only the unfairness of taxation which works in favour of the taxpayer, when we need to remind them of the occasions when it works unfairly against the taxpayer.

Transparency is the big word for those who see trusts covering up beneficial ownership, although this is an issue more relevant to offshore trusts than UK resident trusts. It asks questions about the purposes of offshore trusts today, so if you are involved in this world it’s important to read and respond.

The tax treatment of relevant property trusts is examined, with questions about whether it is sufficient compared with the potential tax (on death) on assets kept in your own estate, or on trusts with life interests that are agreeable on death. 

The review is actually well written and readable, so is well worth considering and responding to by 28 February if you’ve not yet had the chance.

Published: 23 January 2019

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January 2019

Key Contact

John Bunker