UK consults on the taxation of trusts

HM Revenue & Customs (HMRC) has launched a consultation exercise, running from 7 November 2018 to 30 January 2019, to seek views as to whether the current taxation of trusts is transparent, fair and simple.

This consultation is intended to: set out the government’s principles for taxing trusts, and seek views on those principles; assess the extent to which the current trust taxation system aligns successfully with those principles; and seek views and evidence on the case for and against reforms to address any areas of trust taxation which do not currently align with those principles.

The government said it “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 also taking steps to ensure that trust taxation does not produce unfair outcomes and that trust structures do not facilitate tax avoidance or evasion”.

In particular, HMRC wants to assess whether trusts are “fiscally neutral” and whether they provide sufficient transparency in the UK, so “they cannot be used to hide the beneficial ownership of funds or assets”.

“While trusts can offer privacy in managing a person’s affairs, there is a clear distinction between that privacy and keeping such arrangements deliberately concealed from a public authority such as HMRC for the purposes of tax avoidance or evasion,” it said.

The government considers that trusts, whether UK resident or non-resident, should be sufficiently transparent that the separation of the ownership of assets and the benefits arising and those who benefit from them is not hidden. In particular the separation should be transparent to those responsible for administering the tax system or investigating criminal activity such as money- laundering or terrorist financing.

The government is currently taking forward two major initiatives that will have a significant impact on transparency for trusts: the OECD Common Reporting Standard (CRS) and implementation of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs).

The MLRs established the Trusts Registration Service (TRS), an online register of the beneficial ownership of all tax-paying trusts, which went live in July 2017 in compliance with the EU Fourth Anti-Money Laundering Directive (4MLD).

The UK is now preparing to expand the TRS in line with the requirements of the EU Fifth Anti-Money Laundering Directive (5MLD), which entered into force at EU level on 10 July 2018, with transposition and implementation deadlines of 10 January 2020 and 10 March 2020 respectively – during the potential implementation period after the UK ceasing to be an EU Member State.

5MLD will require registration of all UK express trusts – not just those liable for UK tax, as at present – and non-EU trusts that acquire UK real estate. Further discussion of these issues will be within a separate 5MLD consultation to be published in Winter 2018/19.

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