Taxation of trusts

5 February, 2019

Taxation of trusts – our thoughts on proposed changes

Last November the Government launched a high level consultation on the future taxation of trusts.

The consultation paper seeks views on the general principles that should underlie the tax rules applicable to trusts, and outlines the Government’s thoughts on some particular issues. 

As these proposals could affect many of our clients, we assembled a CrippsPG team of tax and trust experts to consider the consultation paper and submit a detailed response.

 What is proposed?

The Government proposes general principles of

  • transparency
  • fairness and
  • simplicity

and that the tax rules should neither encourage nor discourage trusts.

Along with other suggestions, the consultation also proposes that the rate of tax for the ten year charges applicable to ‘relevant property’ trusts – essentially, trusts which would not suffer inheritance tax on the death of a beneficiary – should be increased.  At present, the standard rate of tax applicable to those trusts is 6%. 

Our response

In brief, we agreed with the Government’s view on the core principles on which the taxation of trusts should be founded, with the emphasis on fairness and simplicity, but we pointed out that these are not currently reflected in all of the tax rules.  We called, in particular, for reform of the income tax regime that applies to discretionary trusts, which in our view is penal as it requires trustees to pay tax at the very highest rate regardless of the level of income and imposes additional tax on beneficiaries if distributions exceed the so-called ‘tax pool’.  It is also cumbersome and expensive to administer.

We disagreed with the proposal to increase the tax rate for ten year charges on relevant property trusts.  A number of factors, including the overall tax cost to the trustees of raising the cash to pay those charges, need to be taken into account when determining whether the current rate of tax is fair.  In our view, the rates of tax should not be increased.

Our thoughts on other specific questions raised in the consultation paper are set out in our response paper.

Click HERE to read our response in full.