UK Government Seeks To End Tax Advantages Of Trusts

by Robert Lee, Tax-News.com, London

20 January 2004

An Inland Revenue discussion paper published last month has suggested that wealthy taxpayers could lose the tax benefits of trusts as part of the government’s proposals for reform.

Although Chancellor Gordon Brown’s plans to simplify trust rules in last month’s pre-Budget report were cautiously welcomed by the industry, the Society of Trust and Estate Practitioners (STEP) warned that there is potential for more harm than good to come out of the reform.

"We agree the time is right for the reform of tax provision for trusts, particularly those with less well-off beneficiaries. There is a strong case for significant reform of smaller trusts to enable tax compliance costs to be reduced for the less well-off," explained John Riches, chairman of the STEP Technical Committee following the Chancellor’s statement.

"However we do have concerns that proposals for increasing tax rates for some trusts - where the person who has established them does not benefit personally - may actually cancel out any reforms by increasing the burden for some of the less well-off," he warned.

The Revenue’s stance in its discussion paper however, suggested that: "Anti-avoidance legislation is appropriate for those who use trusts to avoid tax. The government does not want a system that enables people to use trusts to avoid tax."

"As far as possible we should aim to tax the person benefiting from the trust where that person can be identified."

The consequences of this could mean that beneficiaries of trusts, currently paying income tax at 34%, would pay 40% if they were in the higher rate income tax bracket.

In a separate proposal, reports state that government ministers are also planning to increase the taxation of dividends paid on discretionary trusts from 25% to 32.5% from April this year.

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