Having recently listened to Radiohead’s OK Computer album, it is difficult now not to hear Philip Hammond’s trust taxation mantra of ‘fairer, simpler and more transparent’ as if read in a foreboding monotone of a computer and warning of impending doom.
The purpose of the consultation (https://www.gov.uk/government/consultations/the-of-taxation-of-trusts-a-review) is much less worrying with its aims being to set out the government’s principles in taxing trusts and to establish whether the current system is effective by gathering views on what reforms might be made. In particular, what it does not do is offer any specific proposals for changes.
Alongside the consultation, HMRC has also published a research report undertaken by Ipsos MORI titled ‘Exploring the Use of Trusts’ (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/754714/Exploring_the_Use_of_Trusts_research_report.pdf) which looks at what motivates people to establish trusts and has presumably informed the approach taken by HMRC in the consultation document.
In both the consultation and research report, it is acknowledged that trusts have been around for centuries and are an intrinsic part of the UK legal system. In fact, their original purpose is often attributed to 12th Century landowners wanting to protect their assets whilst they left to fight in the Crusades, the principle being that trusts allow for separation between who owns an asset and who can benefit from it.
As noted in Ipsos MORI’s research, it is a complex area and trusts are generally not well understood by many people, so professional advice is key to ensure it is an appropriate thing to do. One interviewee in the report notes this misunderstanding of trusts results in them being seen as a ‘tax dodge’ when the reality is quite different. As HMRC’s consultation paper mentions, ‘successive reforms now prevent this sort of [trust tax] avoidance’.
So, what is HMRC worried about? A proportion of the consultation focuses on whether further changes are needed in order to ensure that the tax treatment of trusts ‘should neither encourage nor discourage’ their use. There is some focus on whether the Inheritance Tax treatment of trusts is fair; a case of deja vu as that was looked at in detail in the consultations in 2014. The consultation also notes a few other potential advantages of using a trust which are arguably quite niche and based on the research report, it would be surprising if taxpayers were either aware or motivated by such advantages.
The real mischief HMRC seems concerned by is whether there are still some who are using offshore trusts to avoid UK tax. Unfortunately, the research report is limited in its conclusions on establishing the motivations for establishing an offshore trust as due to language barriers, only two people could be interviewed so that question has been raised in the consultation.
It will be interesting to see the responses to the consultation and HMRC’s conclusions but in relation to UK trusts and potential tax changes, there does not appear to be anything substantial here that has not been already been looked at it in recent years and one might conclude, perhaps unfairly, that it is little more than a fishing expedition to ensure there is nothing HMRC has missed.
Written by Chris Etherington – Chris is Tax Partner at accountants RSM