On 7 November 2018 HMRC issued a consultation document outlining the principles for taxing trusts and asking for comments and evidence on the reform of trust taxation in line with those principles. Comments may be submitted to HMRC by 30 January 2019.

The document entitled The taxation of trusts: a review outlines the principles that the government considers should be the foundation of the taxation of trusts. These can be summed up as transparency, fairness and simplicity. In the consultation the government is looking for views and evidence on how far the current situation conforms to these principles. The document gives examples of areas of the legislation where the current situation may not be completely in line with the principles set out and also requests comments on the case for and against reform to areas of the trust taxation rules.

The UK government is not putting forward specific proposals for reform at this stage of the consultation.

According to the government UK individuals and companies using trusts legitimately should be able to benefit from a clear and transparent regime that is easily comprehensible, but there must also be measures to ensure that trust taxation does not lead to unfair outcomes and that trust structures do not allow possibilities for tax avoidance or evasion.

Transparency

Through the consultation HMRC intends to assess how transparent trusts are in the UK and to ensure that they cannot be used to conceal the beneficial ownership of funds or assets. The document refers to the Common Reporting Standard and looks for views on whether further measures may be needed.

The document also refers to the potential for avoidance and evasion in the use of non-resident trusts and is looking for comments on the extent of tax avoidance and evasion and ways to deal with it.

Fairness and simplicity

As the government does not consider that trusts should offer opportunities for tax avoidance it intends to assess the extent to which trusts are fiscally neutral.

The rules for income tax, capital gains tax and inheritance tax apply those taxes on the basis of the type of trust, the persons benefiting and the tax that applies. Although the tax regimes in relation to trusts are complex the government considers that they produce generally tax neutral outcomes because they take into consideration the type of trust and the persons benefitting from them.

Comments are however invited from interested parties on the use of trusts in relation to inheritance tax, where trusts are often used in tax planning. It is also important to ensure that taxation in relation to trusts is fairly straightforward so the tax aspects do not become a disincentive for using trusts in situations where they would otherwise be appropriate.