1. General Points

1.1. Given the outcomes of previous reviews and OTS reports, one cannot help but see this is another attempt to increase taxes in the name of “fairness”. We would challenge HMRC to buck the trend and confound the cynics.

1.2. The document is misguided in some of its fundamentals.

1.2.1. First, this review is not about trusts; it is about what are called “settlements” in the tax legislation. We presume units trusts (which are trusts, whether authorised or unauthorised), life policies, pension funds, charities, security trusts (for example to represent bondholders en masse – the core business of Law Debenture plc) are outside the scope of this review.  Similarly statutory trusts such as those imposed under TLATA[1], the Charities Act, and the Education Act (which deems all higher education institutes to be charities with the consequence that their assets are held on trust).

1.2.2. Second, there are many references to “beneficial ownership”. This phrase appears in the tax legislation and in case law, see for example section 42 Finance Act 1930, most critically in s.1154 CTA 2010, and  Wood Preservation v Prior[2] and Sainsbury plc v O’Connor[3]The fundamental point with which you are obsessed, as is CRS etc., is that  trust assets HAVE NO BENEFICIAL OWNER.  No one has the “fruits of ownership”; only the trustees can sell the assets, only the beneficiaries can benefit and the settlor is deliberately giving his assets away, for tax or other reasons.

1.2.3. However, where there is clear evidence that the settlor and trustees act as if the settlor was the beneficial owner then we suggest that statute should provide that the trust is ignored.

1.3. Another theme in the review is that “trusts should be used only where appropriate”. What makes HMRC and HM Government think that they know better than individuals and businesses as to what is the appropriate structure in which to hold their assets?   If anyone wishes to use a trust then they should be free to do so, and suffer the economic and tax consequences which follow.  See 2.1 below for common non-tax related reasons to use trusts.

1.4. The world is changing

1.4.1. From the evidence of their actions to date, neither HM Government nor HMRC understand that the internet has changed the world of business and individuals for ever. Part of the rise of the self-employed is due to the fact that people can earn a living providing services without an office, or even being in the same country. All that many such people need is a seat, a desk or table, wifi /  internet, coffee and a toilet.   These can be found in any coffee shop as can people sitting at lap tops.  It is no wonder that Pepsi bought Costa Coffee for £3.9bn/US$5.1bn.

1.4.2. This also means that their lives are more international. They might be British nationals but they can live and work anywhere, “avoiding” UK income tax, (if by avoiding you mean not being subject to income tax) but possibly stuck with much higher local rates of tax and social security contributions, local forced heirship rules and death taxes.

1.4.3. Trusts can sometimes overcome these issues plus the difficult issue of renvoi[4], although the EU is making steps towards solving this within the EU, no doubt with a tax which goes to the EU’s own resources.

1.5. We support fairness, a level playing field, making taxation sufficiently clear, transparent and fair that it is removed from the decision making process for businesses and individuals, and transparent dealings with tax authorities . We do not support transparency at the cost of privacy, as is the case with the PSC register.  Rules like these might expose criminal activity (highly unlikely, criminals know the rules better than most people) but they also expose those in the private sector who are fighting criminal activity.

1.6. Any changes must continue to recognise that trusts split income from capital and each fund is treated independently.

1.7. Given the number of errors and mis-statements in what looks like a very lazily prepared document, we hope HMRC and HM Government can avoid repeating the fiasco in 2007 when Gordon Brown thought he would have a dig at David Cameron by taxing the trust set up by Cameron’s father for the grandchildren’s school fees, and instead produced legislation which led, inter alia, to the Prudential suspending the writing of life policies as the trusts under those were caught by the new IHT rules on relevant property trusts. For such an esoteric issue to make it to the front pages of the national press in an unfavourable light was quite an achievement.

2. Comments on Section 2 – Introduction

2.1. Trusts have been part of the English legal system for centuries, but not in Scotland, which is still, at the time of writing, part of the UK. Their use was initially to allow older generations to try and control assets after their death.  Then the rule against perpetuities was introduced.  Today that remains a common use in and outwith the UK for families everywhere.

2.2. Common reasons to establish a trust include :-

2.2.1. Asset protection against creditors, etc.;

2.2.2. To circumvent the forced heirship[5] provisions common in civil law jurisdictions;

2.2.3. To direct income to a specific person of class of people; and

2.2.3. Prevent assets falling into the hands of “rogue” children, spouses, ex-spouses etc.

2.3. Financial institutions use trusts to

2.3.1. Ring fence assets from creditors / as a form of security

2.3.2. To hold pension assets

2.3.3. To hold the proceeds of a matured insurance policy

2.4. The English courts also use trusts for

2.4.1. personal injury settlements,

2.4.2. the matrimonial home especially where minor children are involved, and

2.4.3. those with mental or physical disability.

2.5. However, trusts have acquired a reputation for tax avoidance due to their misuse by people in jurisdictions which do not recognise trusts. 

3. Trust usage and Policy Principles

3.1. The explanation of usage is dire; we would expect an 18 year old intern to do better. Can HMRC not afford decent trust law text books, or even ask someone who knows what a trust is?

3.2. Most charities are set up as limited companies, usually limited by guarantee. The trust is imposed by the Charities Act such that those who run the company are also trustees of the assets, not the owners.   See for example the Chartered Institute of Taxation.

3.3. Those who cannot look after themselves could, in cases of lost mental capacity, be looked after by someone with a Lasting Power of Attorney, or Court of Protection, or as you say by trustees.

3.4. The trusts for deposits etc. which you mention in 3.4.4 include express trusts, Quistclose[6] trusts, resulting trusts, Romalpa[7] clauses, client accounts and more. Also, is TLATA in or out? Or do we shake it all about?   As with everything in taxation, it pays to be clear and we refer back to paragraph 1.2.1.

3.5. Paragraph 3.5 misses the point entirely. How can you tax people who do not receive any income, assets which are not beneficially owned by anyone, and trustees who have power and control but no economic interest, in the same manner as if they were owned by an individual?  Income tax and CGT try to do this by first focussing on the settlor, which works as long as he is alive and UK resident, and then on benefits received by UK residents, without taxing the corpus itself.

3.6. Given that we cannot think of any tax on pure legal ownership, merely giving legal ownership to someone else does not change your tax liability; indeed such arrangements (bare trusts) are expressly excluded from the UK tax rules on settlements. Paragraph 3.6 is simply wrong.

3.7. The comment on pilot trusts is interesting as in the original GAAR guidance Appendix D, the creation of pilot trusts was expressly outside the GAAR as normal practice and not egregious tax planning.

3.8. Having regard to paragraph 3.9, is it the intention to include other forms of settlements, e.g. foundations, in this review? Also we believe you are missing the point, that being that non-UK resident trusts are not resident in the UK, and given that the UK has a residence based tax system, they should not be taxed by the UK.  As regards 3.9.3, we refer you to 1.3.

3.9. Similarly in 3.10.1, see comments on beneficial ownership above in 1.2 and 3.5.

3.10. Please be aware that you should not to do what France did in seeking to tax trusts which was to require all persons who were beneficiaries of a trust to put it in their tax return. Many discretionary trusts of French settlors now include the French Cabinet as beneficiaries so that they are obliged to put the details on their tax returns, whether they know them or not!

3.11. We object strongly to para 3.10.3. Why should trusts have a straightforward tax system, when the rest of us have to make do with the incoherent leviathan of the UK tax code?

3.12. Question 1

3.12.1.The principles are fine in themselves, but transparency is an entirely different issue from the other three. Fairness and simplicity, as we found with Gordon Brown’s Chancellorship, pull in opposite directions.  Simple is wonderful but then people complain that its hard edges are unfair, so they get softened and softened until it becomes so complex you forget that your original mission was to drain the swamp (when you are up to your neck in alligators).

3.12.2. Similarly neutrality is difficult as you are comparing apples with helicopters. No matter how hard you try, you end up with something which will not fly and is inedible.

3.12.3. The paper considers neutrality in terms of tax take, but different people have different objectives. If a person is 70, and of good health, and settling a trust and paying 20% could be the steal of the century given inflation etc.,.  Or just giving assets away as soon as you can afford to.  Capital Transfer Tax was a beautifully constructed tax, even though it relied on the concept of value.  It should never have been converted into IHT but was done so for political reasons.  The rate should have been lowered or tapered.

3.12.4. Establishing a trust is not a zero cost exercise. Fees can run into thousands of pounds per annum whereas doing nothing costs…, nothing.   You also have to know you can trust the trustees.   Unfortunately, FCA regulation (or equivalent) is not a guarantee of probity, or indeed competence.

4. Transparency

4.1. We agree the first sentence of 4.1. The second sentence is your opinion, with which many people would disagree.  HMRC does not have to live with, and has very little idea of, what it is like to try and follow, or implement, their legislation.  As to 4.2, please 1.5 above.

4.2. Question 2

4.2.1. Our strong view is that as CRS, in its new OECD post FATCA form, is still in its early stages, that the new regime should be given some time to settle in and that in 2021, HMRC should publish a report stating, inter alia, which countries are actually sending data, whether that data is a trickle, or a flood and HMRC can only scratch the surface of it, the proportion of TINs/UTRNs reported which are not actually genuine (we note there is no direct tax equivalent of VIES for checking VAT numbers), and whether this has been worth the billions of pounds and dollars which have been spent on CRS /  FATCA by banks and the rest of the private sector.

4.2.2. For 4.6 see 1.2 and 3.5 above.

4.3. Question 3 – evidence

4.3.1. Let me fill the NCA’s intelligence gap; the assessment is correct because any entity ultimately owned by a trust cannot open a UK bank account, or if they manage it, it will be after many, many, months of irrelevant questions from the bank’s compliance department, who like HMRC are obsessed with finding the non-existent beneficial owner. We have come across companies for sale purely because they have a bank account, banks refusing to transfer mandates to the buyers of companies, and we have this quarter brought the ownership of 4 trading groups into the direct ownership of UK resident individuals who can claim business property relief and entrepreneur’s reliefs rather than leave them under long standing family trusts.  This was done purely because of the difficulties of trying to satisfy the compliance departments of various banks.

4.3.2. The offshore compliance in separating capital and income receipts, and calculating s.733 and s.87 pots of income and gains is largely (98%+?) ignored. In practice one used to clean up the trust (see GAAR Appendix D, example D21, now s.87I et seq TCGA and s.733A et seq ITA), or just deem everything received by a UK beneficiary is income.

4.3.3. We recommend that in view of TRS and CRS, HMRC wipe the slate clean on s.733 and s.87 pots with effect from 6 April 2019 but make it clear to the world of offshore trust administrators that (i) the higher offshore penalties will apply to trusts which cannot identify these pots and (ii) failure to maintain such records from that date will result in any benefit received by a UK resident from such a trust being taxed at the highest income tax rate at the time and cannot be subject to the remittance basis.

4.4. We do not approve of the approach taken in s87I etc., which is “we do not care about the rest of the world – we come first”.

4.5. Further we take this opportunity to refer to the shambles which was, and continues to be, the introduction of TRS. It fails to deal with multiple settlors, or the provisions relevant to them, additions, spectral settlors  and expecting trustees the world over to look on the internet at Gov.UK (which the courts have held is not what H<RC are entitled to expect of those outside the UK[8]).

5. Question 4

5.1. The principal and obvious tax reasons for using a non-UK resident settlement include the excluded property regime, the remittance basis, in cases where the rest of the family have NOT moved to the UK etc. We refer you to James Kessler’s QC’s publication “Taxation of Non-Residents and Foreign Domiciliaries”.   Expensive, but we are sure that with an annual budget of £3.8bn, that MRC can afford it.

6. Question 5

6.1. Avoidance is in the eye of the beholder. We have plenty of evidence of non-UK resident trusts being used as excluded property trusts to avoid IHT, non-UK domiciled individuals blatantly using their remittance basis to receive trust distributions outside the UK and spending them on yachts, villas, alpine property and the like OUTSIDE the UK.  These scoundrels do not understand that they should bring all their wealth into the UK and pay UK tax on it, and then spend it abroad.   I suspect HMRC regards these reprehensible actions as “avoision”.

7. Fairness and Neutrality

7.1. Apart from the use of the words “trusts” and “UK” when you mean “settlements” and “English”, we applaud 5.1 and 5.2.

7.2. As regards 5.3, this glides over the issue with which no one seems to want to grasp, the fiscal elephant in the room, and that is discretionary trusts, especially non-UK resident discretionary trusts.   For these trusts none of the 3 options work or indeed make any sense.  The Golden Rule of Taxation is that it works best when the taxpayer has the cash to pay it (see the unimplemented Planning Gains Supplement – abandoned in 2011 when no housebuilder had any cash, let alone for a new tax on an increase in value (the Consultation Document suggested that they could borrow it, but by 2011 banks were not lending new money to anyone for anything) – see https://www.bpf.org.uk/media-listing/press-releases/industry-welcomes-scrapping-pgs ).   Everyone hates “dry” tax charges, the taxpayer who has to raise the money from elsewhere, and HMRC who are trying to get blood out of a stone.

7.3. If there was an easy way of doing this then no one has found it. The entity which has control of the assets is the Trustees, so they should in theory have the resources to pay tax.  This works for UK resident trusts but not for non-UK resident trusts.

7.4. We are alarmed / gobsmacked / stunned [delete as appropriate] that there is NO discussion in the Review, of discretionary settlements, especially those which are non-UK resident.  This is where the real issue lies.  This is because until there is a distribution there is no beneficial owner.  Also the settlor may be dead (and certainly will be in respect of will trusts, although we must admit that death can be an excellent tax avoidance move, as shown in the GAAR Guidance Annex D example D19[9], but is understandably not popular with clients).  This only leaves the third option in 5.3, taxing the income or assets of the trust itself

7.4.1. UK resident discretionary trusts are already unfairly overtaxed, especially on accumulated income, which is taxed at 45% irrespective of the level of the income (above a paltry £1,000 standard rate band). Gains are taxed at 28%.  There are not even reliefs for trusts which are IHT privileged.

7.4.2. It is therefore no surprise that non-UK resident trusts are more popular, even after taking into account the transfer of assets abroad provisions (Chapter 2 Part 13 Income Tax Act 2007), because once the settlor is dead or non-UK resident, income can accumulate tax free. Capital gains are also tax free initially.   However distributions to UK resident individuals can be taxed at 45% for income and capital gains up to 44.8%[10].   Effective tax rates can be even higher (see 7.6.1 below).

7.4.3. Could HMRC tax non-UK resident trusts settled by a UK domiciled person on their income and assets? In theory yes, in practice, no.   Further such an approach would be international tax mis-appropriation, risking double, treble taxation or worse, especially if there are non-UK resident discretionary or charitable (as there invariably are) beneficiaries.

7.4.4. As for CRS/transparency, then we think the best approach is to adopt for tax purposes, the anti-money laundering of identifying the source of funds, not to tax them but to understand where they came from.

7.5. For our part, we believe that the mindset needs to change and to view offshore discretionary funds for what they are, private versions of non-UK OEICS which may or may not give rise to a tax charge, the key difference here being that the beneficiary might never receive anything. Although we do also have the offshore income gains rules.

7.6. Further, distributions from non-UK trusts are actually very tax inefficient. We have many cases where income is taxed, then goes to a tax haven, sits there and then is paid out and taxed again and the right to tax credits lost forever.  We are actively encouraging trustees to end this practice and be more sensible in matching beneficiaries’ needs with income for which they can obtain a tax credit.

7.6.1. For example, consider a settlement which was originally established by a US person who now lives in Switzerland and owns a US trading company. He put the shares of the US company into a Jersey resident trust together with part of his US property portfolio.   His children went to school in England and some of them have settled there, some are at College in the UK and some are in Switzerland.  The US dividend suffer a 30% withholding, and the US rental income tax at an effective rate of 25%.    The Trustees, being resident in Jersey, cannot use these taxes to offset any Jersey taxes (as there are none).   So they are left with 70% and 75% of the post tax income.   If they later distribute any of this to a UK beneficiary, then they will pay income tax on the 70% or 75% received, which at the top rate of income tax is an effective rate of 61.5% or 58.75%.   However if ESC’s B18, A93 and the double taxation provisions are used, these rates would be a maximum of 45%.

7.6.2. This is neither fair nor neutral.

7.7. Paragraph 5.5.1 refers to the use of the nil rate band every seven years as if it was a trust specific issue. It is not.  The same applies to potentially exempt transfers which become exempt after seven years.   The third paragraph of 5.5.1 implies the choice is hold on to the assets or use your nil rate band every seven years to put assets into trust.  This is not correct.   There is a third alternative[11], the assets could be given to children or even grandchildren (OMG, missing a generation out; could there be a more blatant case of avoision than that?!).   We are disappointed at the number of errors and omissions in this Review.

7.8. For information, in the real world, advice for UK domiciled individuals starts with (1) make a will and utilise the spouse exemption (2) look at the nil rate band for houses (never ever tax plan with your home) (3) use ordinary gifts out of income, for example if you have paid off your mortgage, then pay up to the same amount to your children or grandchildren, (4) use other reliefs e.g. on marriage, (5) consider leaving 10% of your estate to charity on death of the survivor of you or your spouse, (6) You will die, it is a “when” not an “if”, (7) if you have a business, make sure it qualifies for BPR, and that all the business assets are held in a way which will qualify (we have had cases where groups have substantial investments in a trading group, but where the trading business’s properties are held in a separate property investment group; £10m of warehouses is £4m of IHT on death), (8) nil rate band will trust and (9) explore other reliefs. Only then would you consider seven year planning or trusts.

7.9. For non-UK domiciled individuals, the use of excluded property trusts often comes in after the spouse exemption, if not be not before.

7.10. Paragraph 5.5.2 is a retrospective and a disingenuous attempt to justify the current regime.

7.11. Question 6

7.11.1. Our preferred route would be IHT – abolish it for trusts CGT – apply normal rates and reliefs Income tax – where there is no living settlor, tax accumulated income of UK resident trusts at 20% with credit only for same year distributions.

7.11.2. Our second preferences would be IHT – revert to capital transfer tax but with a nil rate band of £5m (the USA has a lifetime exemption for gifts and on death of $5m).

7.11.3. For discretionary trusts, it may well be the case that the rules we have already, although incredibly complex, especially post 2017, is the best HMRC could reasonably achieve.

7.12. Income and capital receipts in trust law. Capital is capital and income is income. They are taxed differently for individuals and so the same should follow for trusts.  We deplore the suggestion that because disputes occur (usually die to poor or obscure drafting) then there should be equal tax treatment between the two categories.  Disputes arise because the income beneficiaries and frequently not the same individuals as the capital beneficiaries – see HMRC Manual CG33922, the procedure to refer to HMRC Bootle, and Sinclair v Lee[12].

7.13. Void transactions. Frankly if a transaction is held to be void, tax is the least of the parties’ concerns. It seems that only HMRC, and a few paranoid individuals, are obsessed enough with tax to think that the world revolves around it, and in HMRC’s case, UK taxation only.

7.14. Question seven. See answer to question six.

7.15. Question 8 We refer to 7.4.1 above.  Trusts which are advantaged for IHT should be similarly advantaged for income tax and CGT.  !8 to 25 trusts should revert back to 25.   Gordon Brown believed that people are able to cope with coming into money at 18, but psychiatrists will tell you that the human brain is still in a melting pot of development and does not mature until the age of 25 or thereabouts.  Lost the will to live at this point.

7.16. Question 9 See all of the above, for example the standard income tax allowance bears no relation to an individual’s tax allowances, e.g. income accumulating for a minor. IHT is penal and fiscal drag is bringing more and more estates into the charge.

8. Summary

8.1. This Review document is the laziest, most ill-researched and ill-informed consultation document we have seen from HMRC in a long time (probably as far back as the document on the introduction of the cost sharing exemption for VAT).

8.2. The document should be withdrawn, and re-released as a draft for comment.

8.3. The omission of a proper discussion of discretionary trusts is an incredible, if not negligent, failure. The document should be withdrawn because of this one fact alone.


[1] Trusts of Land and Appointment of Trustees Act 1996.

[2] 45 TC 112 CA.

[3] [1991] STC 318 CA.

[4] A subset of the choice of law rules for Conflict of Law cases.  Renvoi, (French for send back) is where a court refuses jurisdiction and it is possible to find that an asset of a deceased cannot be administered in any jurisdiction as each jurisdiction claims another jurisdiction’s court should deal with the matter.   E.g. UK resident, French national with a house in Spain.

[5] These laws determine where your estate goes on your death. France, Spain, Switzerland are typical and cannot be contracted out of.

[6] Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHK 4.  What people often forget is that a bank account in these categories protect the beneficiary against the insolvency of the account holder, but not the insolvency of the bank (see Lehman Brothers).

[7] Aluminium Industrie Vaasen BV v  Romalpa Aluminium Ltd [1976] 1 WLR 676 CA.

[8] See HMRC v McGreevy [2017] UKFTT 690 (TC).

[9]  This example shows how HMRC’s view is so tax-centric and bears no relation to real life.  If a husband has just discovered that his wife is terminally ill, then the very last thing on his mind will be washing out the gain in his investment portfolio.

[10] Section 91 TCGA

[11] We take the view that in modern English usage, that there can be more than two alternatives.

[12] [1993] Ch 497.

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