Changes to Britain’s centuries-old trust regime are looming as HMRC is concerned that trusts are letting some families pay less inheritance tax than those who do not pay accountants to set up the complex arrangements.
To look at if the law should be changed, HMRC has published wide-ranging research of trusts to find out if they are fair and not just a way of avoiding tax.
Trusts set up as part of estate planning exercises to minimise inheritance tax are specific targets for the consultation.
“The government wishes to ensure that the many UK individuals and companies using trusts legitimately benefit from a clear and transparent regime that is easy to understand, while taking steps to ensure that trust taxation does not produce unfair outcomes and that trust structures do not facilitate tax avoidance or evasion,” the consultation document said.
Inheritance tax trusts allow individuals to move wealth out of their estate, on which inheritance tax is usually paid at 40% on wealth above £325,000 after they have died.
HMRC will use the consultation to assess how transparent trusts are in the UK, so they “cannot be used to hide the beneficial ownership of funds or assets”.
For offshore trusts, privacy was a major factor as a trust guarantees anonymity. Other factors that came into play included ease of controlling assets across borders and tax avoidance.
“Agents tended to emphasise the personal reasons that settlors had for setting up UK based trusts and said that there were no tax benefits in having one. While personal factors were important, settlors also placed importance on perceived tax benefits, and on reducing IHT through use of the IHT nil rate band,” said the report.
Tax professionals told researchers that wealthy families were turning way from offshore trusts due to disclosure laws in the UK and other countries.
“Clients with assets offshore may be encouraged to bring them onshore if the UK tax regime was less punitive, said agents. Rates for IHT and CGT were particular areas of focus. The view of agents was clients were not averse to paying tax but they were averse to paying the level required in the UK,” said the report.
The consultation comes ahead of a wide-ranging review into inheritance tax next month by the Office of Tax Simplification, and the announcement of a renewed effort to crackdown on offshore tax avoidance.