Trust taxation – further change ahead?
19 November 2018
Three years ago David Gauke, Financial Secretary to the Treasury, announced that non-doms would need to start paying a “fair share of tax” and this was followed by the introduction of the non-dom forms in April 2017.
There is anecdotal evidence that these changes have already resulted in a net outflow of non-doms from the UK. The statistical data published by HMRC so far suggests that fewer individuals are claiming non-domicile status. The data only goes up to 5 April 2017 and the decline is no doubt in part due to the 2008 introduction of the annual “remittance basis charge”. The decrease is matched by an upward trend in the amount of overall tax paid by those non-doms. This makes sense, since you now need to have more offshore income to make it worthwhile claiming non-dom status. It will be interesting to see the data for 2017/18 when this released next year.
One crucial factor impacting whether individuals stay or go is the stability of the tax system. There is undoubtedly a real risk that some high net worth individuals will leave if the goal posts keep moving.
The announcement this week of a government consultation into the treatment of trusts will not do much to dispel such concerns. The trusts regime was subject to extensive changes in April 2006 followed by further consultation on the rules for non-doms in 2015, resulting in a subsequent overhaul of the regime effective 6 April 2017. These provisions were included in the new rules specifically to dissuade longer term residents from leaving the UK, and also to make sure the UK remains an attractive destination for new arrivals. Whilst the changes were on the whole positive, clients and their advisors were kept busy for many months modifying existing structures to ensure compliance with the new regime.
“The Taxation of Trusts: A Review” seeks views on the case for reform of the trust tax regime, with a view to meeting the government’s desire to ensure that “trusts do not offer either a tax advantage or disadvantage”, and make the taxation of trusts fairer, more transparent and simpler. The desire to prevent a tax advantage is odd bearing in mind that the protected trust were designed to be tax attractive in order to prevent non-doms from fleeing the UK! Non-doms, particularly those approaching 15 years of residence, currently have a very strong incentive to set up trusts and this is a direct consequence of the rules introduced in 2017.
The consultation document is therefore at odds with the government’s policy for encouraging high net worth individuals to live in the UK, and the suggestion that further change may be forthcoming does little to allay the fears of those individuals concerned about the general stability of the tax regime.
A large focus of the consultation is around the potential use of trusts for tax evasion and concealing the beneficial ownership of assets. These are important issues which must be addressed. However significant reforms have already been introduced to deal with these concerns, by requiring UK trusts and many offshore trusts to register and disclose comprehensive information to HMRC (the Trust Register).
The government is seeking comments by 30 January 2019 – not the best timing, bearing in mind the 31 January tax filing deadline!