Government urged to simplify trust tax system

Recommendations from HMRC review

Jayna Rana
HMRC set out the principles for taxing trusts and sought views on reform in line with them

HMRC set out the principles for taxing trusts and sought views on reform in line with them

The Government must take action to restore the neutrality of trusts, urges WAY Investment Services, provider of trust-based inheritance tax planning solutions.

The group said the Government "needs to simplify the taxation system for trusts in order to meet its own objectives" in response to its latest consultation on the taxation of trusts.

HM Revenue & Customs' consultation The taxation of trusts: A review, which ran from 7 November 2018 to 28 February 2019, set out the principles for taxing trusts and sought views and evidence on reform in line with them. 

It said "tax treatment should neither encourage nor discourage the use of trusts" in the consultation, but WAY Investment Services believes complexity in the rules - largely a result of rule changes introduced in 2006 - is putting families off from establishing a trust.

Fund tax, but not as we know it

The firm said trusts have been used for hundreds of years, with the basic principle of allowing a person (the settlor) to instruct another person (the trustee) to manage assets on behalf of a third party (the beneficiary).

Families often launch trusts to manage assets on behalf of their children yet the number of trusts in the UK appears to be falling dramatically, with the number of trusts and estates in the UK preparing a self-assessment tax return dropping by around a third from 225,000 in 2003-04 to 156,500 in 2016-17, according to WAY.

It added a simplification of the tax regime would not necessaily lead to an increase or decrease in tax revenue from trusts, but would rather support families to use trusts in appropriate circumstances.

For example, WAY Investment Services recommends the Nil Rate Band (NRB) is restored to increase in line with inflation while it should also absorb the value of the Residence Nil Rate Band (RNRB), which should be repealed on the grounds that it is neither fair nor simple.

WAY also recommends the removal of the periodic charge, which accounted for just 3.44% of IHT receipts in the 2017-18 tax year. It said it should only be levied on exit events when there is a real transaction taking place, which can be achieved in two ways: 

  1. Calculate the periodic and exit charges as currently but defer collection of the periodic charge until an exit event takes place. The periodic charge would be levied on a pro-rata basis in line with the proportion of the trust assets exiting, or, 
  1. Remove the periodic charge as a concept and calculate the exit charge based upon the whole period from entry to exit.