Publication announcement

Modernising the tax system for trusts

A number of documents regarding the taxation of trustees’ income and gains are being published today. They are:

  • a summary of responses to the discussion paper issued on 16 March 2005;
  • draft legislation and explanatory notes;
  • a partial Regulatory Impact Analysis relating to the draft legislation; and
  • a paper providing guidance on the correct tax treatment of Trust Management Expenses.

Background

In his 2003 Pre-Budget Report, the Chancellor announced plans to modernise and simplify the income tax and capital gains tax regimes for trusts. A formal consultation document was issued in August 2004, and, after analysis of the responses, legislation was introduced in the Finance Act 2005 providing a standard rate band for all trustees who pay tax at the special trust rates and a new, favourable tax regime for certain trusts with vulnerable beneficiaries. In a discussion paper issued on 16 March 2005, the Government asked what was then the Inland Revenue to discuss four of the measures covered in the consultation document with interested parties.

The responses to the discussion paper issued on 16 March 2005 are summarised in this document (PDF 41K).

Draft legislation and explanatory notes

Further to those discussions, and in the light of the responses, the draft legislation published today principally covers the following measures:

  • a common meaning of “settled property”, to apply for most purposes of the Taxation of Chargeable Gains Act 1992 (“the TCGA”) and the Income Tax Acts;
  • a common meaning of “settlor”, to apply for most purposes of the TCGA and the Income Tax Acts;
  • provision for the trustees of a settlement to be treated as a single person for the purposes of the Income Tax Acts (as for the TCGA);
  • a common test to determine whether, for the purposes of the TCGA and the Income Tax Acts, the trustees of a settlement are resident in the United Kingdom;
  • provision for the trustees of certain settlements to elect to be treated as non-UK resident for the purposes of the TCGA and the Income Tax Acts;
  • provision for the trustees of a settlement to elect that a sub-fund of the settlement be treated as a separate settlement for the purposes of the TCGA and the Income Tax Acts in certain circumstances;
  • provision for the income of settlor-interested settlements to be treated as though it had arisen directly to the settlor;
  • a measure designed to legislate the existing practice of not taxing beneficiaries who receive discretionary income payments from the trustees of settlor-interested trusts; and
  • modifications to some of the provisions in the TCGA which determine whether a person is a settlor in relation to a settlement, so that account is taken of dependent minor children.

There is a possibility that one of the proposals, the proposed election regime for the trustees of certain settlements to be treated as non-UK resident for the purposes of the TCGA and the Income Tax Acts, may constitute a State aid for the purposes of European law. We are in consultation with the Department of Trade and Industry about this. If the conclusion of those discussions is that the proposal does constitute a State aid then it is possible that the draft provisions may need to be revised or withdrawn.

This is draft legislation, and work to refine it is continuing. Work will also be taken forward on the issues surrounding income streaming and the abolition of the tax pool, as the question of how best to deal with settlements where the trustees and /or beneficiaries are non-UK resident has raised some complex issues. Work is also continuing on a possible future package of measures aimed at reducing tax burdens on the personal representatives of deceased estates.

Any comments on the draft legislation (i) draft Income Tax legislation (PDF 105K), (ii) income tax explanatory notes (PDF 46K), (iii) draft TCGA legislation (PDF 167K) and (iv) TCGA explanatory notes (PDF 94K) should be sent to HMRC by 17 February 2006.

Contact details:

e-mail: Andrew.Hayward@hmrc.gsi.gov.uk

Written comments to:

Rachel Salisbury
Trusts Modernisation team
Room G45
100 Parliament Street
London
SW1A 2BQ.

Partial Regulatory Impact Analysis

This documents sets out HMRC’s view of the costs and benefits of the measures included in the draft legislation (PDF 46K). Again, comments on the costs and benefits of the draft legislation will be welcome and should be sent to the contacts given above.

Trust Management Expenses

This paper (PDF 124K) contains guidance on Trust Management Expenses following discussions with the main representative bodies, who largely agreed the content. However, we were not able to reach agreement with the representative bodies over the deductibility of certain trustees' fees, and so what is said in the paper on that subject reflects the views of HMRC. The guidance is intended to clarify the existing legal position and not to change how TMEs are dealt with.