Trust Tax Consultation – Nothing To See Here (Yet)

Please forgive the unusually technical nature of my blog today, but this is an issue that impacts on many of our clients and potential clients – trust taxation.

Many people would have seen the media reports about the consultation that HMRC has launched on the taxation of trusts (among other issues I might add).

The consultation is focusing on the taxation of trusts, their operation and administration and also checking that the treatment of trusts is fair and equitable when taken together with the other possible methods of estate planning.

In principle, none of this is a bad thing.

My Good Friends – The Media

Now as you might expect, the media have vastly over-done the potential impact of this consultation. Some headlines have declared that ‘IHT trusts will be stripped of their tax advantages’.

This makes for a good headline (and no doubt draws readers and traffic to websites to drive ad revenue), but is it actually true?

Well, as with any consultation, the strict answer is – we don’t know.

A consultation is just that, a consultation.

HMRC are seeking input and ideas on some of the questions posed by the consultation.

What we can glean from the questions though is the direction of travel and nothing in the consultation document itself (unlike some of the media commentators, I actually saw fit to read the whole document before making prophecies of doom) has given me major cause for concern at this time.

First of all, many consultations result in no change at all. Either the consultation does not deliver a viable alternative to the status quo, or the whole things just loses steam and falls off the radar. This has happened countless times before.

But, even if we do see action, I think much of it could be positive.

The consultation document first talks about simplifying the taxation of trusts (nothing about the rates here, just the operation). This would be incredibly welcome given the current complexities of accounting for income tax, capital gains tax and inheritance tax across the settlors, the trustees and the beneficiaries of a trust.

Three different taxes accounted for across three different groups of people can and does get messy sometimes and any simplification to this system will do nothing to harm the appeal of trusts.

The document also talks about the fact that the 20% entry charge on gifts into trusts could be perceived as unfair when compared to the unlimited potential gifts we can make to other people.

Although nothing is certain, the language here hints to me that HMRC could be playing with the idea of removing this charge which would again be most welcome.

The only potential downside is that there is hints of an increase to the 6% periodic charge. While this would be unwelcome, it would also be relatively un-important for the majority of our clients on the basis that we usually manage trusts to be below the nil rate band allowance, meaning that no tax is due in any case, regardless of the rate.

The consultation document recognises the benefits of trusts in financial planning and in society and so I don’t see any prospects of trusts being ‘outlawed’ (again, contrary to some headlines you may stumble across).

As with many things, ‘wait and see’ will be the best approach here.

Firstly, the consultation may come to nothing, in which case, no action will be required.

Second, the consultation could provide benefits to trust planning, in which case we will look at how we can take advantage.

And, if we do see any negative changes, we will analyse them and plan around them, just like we have planned around numerous negative tax changes before and no doubt will again in the future.

Despite the headlines, I don’t believe that the consultation (in its current form) is particularly dangerous.

Taking action based on sensationalist headlines on the other hand – well that could prove very dangerous indeed.

"The value of investments and the income from them may fall as well as rise. You may get back less than you originally invested"