Spring time – time to spring clean trusts

 In Tax, Trusts

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Spring is traditionally a time for a fresh start. A time for youthful exuberance. A chance to have a clear out and feel free from the detritus which can hold us back. As a country we have been living with the prospect of change for some time with the Brexit manoeuvres. Perhaps these changes are beginning to impact on our future work.

HMRC has announced that this Spring it will consult on a new approach to the taxation of trusts. It wants to simplify the taxation of trusts. Whilst welcome – why? Perhaps the clue is in the title of an item in the 14th Law Commission programme of work entitled ‘Modernising trust law for a Global Britain’. I suspect that both initiatives are to encourage non-domiciled persons to stay and invest in the UK and to welcome new investors.

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The Office of Tax Simplification was asked by Government to review Inheritance Tax (IHT) and it starts in earnest this month. Who knows what the outcome could be – the abolition of IHT?

Taxation changes

We would all welcome simplification of the tax treatment of trusts. Meanwhile some simple clarity would help. For example, why not allow professionals access to the full version of a tax form with its accompanying Guidance for completion and relevant toolkit all on the same page on .Gov.uk? This might encourage those less familiar with a particular form to read the Guidance and use the toolkit in completing the form. It would be better than having to answer questions to be led to the right form – fine for lay people but not helpful for practitioners.

As one practitioner suggested to me the other day, why isn’t the Unique Taxpayer’s reference just that – one tax reference for income tax, capital gains tax, IHT and SDLT allocated to a trust at the start to avoid delays in having to apply for fresh numbers for each tax? Good question.

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Introduction to Trusts & Taxation of Trusts

Introduction to Trusts – 10 July 2018 – perfect for those who need more confidence in their approach to the administration and use of Trusts

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Taxation of Trusts – 11 July 2018 – ideal for those who need to master the inter-relationship between Trusts and tax

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Fundamentally, moving to gross income on interest and dividends does make dealing with them easier for individuals but trusts pay different rates on these items depending on the type of trust. It is only trusts where a beneficiary is entitled to the income automatically where the individual’s personal nil rate band can be set against the trust income. The draconian rate of income tax on dividends and other income (38.1% and 45% respectively) on trusts where income may be accumulated means trustees often now have to consider granting beneficiaries revocable life interests. Just more paperwork to reduce the impact of too high taxes on certain trust funds.

Let’s be radical and consider the impact of making any trust for any minor children simpler, whoever creates the trust. Vulnerable beneficiaries must be bereaved so that fortunately does not apply to many. Surely it would save a lot of work and cost if trustees of trusts for minor children could accumulate income if necessary; invest in stocks and shares not just bonds to get the best returns and pay a flat rate of income tax on the returns – say 20%.

Does the Exchequer need to make a higher charge on trusts where the income can be accumulated where the beneficiaries are not minor children? Why not give the trustees the same allowances as individuals and tax the income at the same rates? The more income the higher the rate of tax.

As far as IHT is concerned, let’s just have a lower rate, say 20%, which kicks in at a higher point, such as £2 million and do away with all the small exemptions like annual and gifts in consideration of marriage. For trusts we could have a flat rate on the relevant property regime charges, say 10%, which would reduce all the calculating and simplify the form filling.

Trust changes

Are we to be a global player once more? If so, should we not have in our armoury similar tools to those available in other jurisdictions? Perhaps we are too attached to trusts per se and we should look at foundations and use companies more to hold investment assets.

No professional, and surely no lay person, wants to take on a task which opens them up to personal liability; sometimes through no fault of their own. Reckless behaviour should not be encouraged but if it was easier to set up a Trust Corporation or to obtain indemnity insurance perhaps it would encourage a wider range of persons to act as trustees or form Trust Corporations.

Gosh, all this ‘Spring clean’ thinking already makes me feel better. It certainly helps to have blue skies to do some blue sky thinking. What do you think? Why not take part in some of these consultations? The wider the range of views considered hopefully the more useful the outcomes.

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