Proposed changes by HMRC to the tax disclosure regime are giving me cause for concern.
How would a client conversation feel if advice you had previously given resulted in them having to disclose to HMRC that they had used a “tax avoidance scheme”?
The gap between perception and reality is a harmful one when it comes to how trusts are viewed through a “tax avoidance scheme” lens, compared to the everyday reality of how and why people use them.
This gap could have far-reaching consequences and it’s time we stood up and reclaimed the middle ground for clients who use trusts.
The mainstream use of trusts
With people living longer, family structures are often complex as people have perhaps divorced, remarried or started a new life, even at an older age.
The ONS figures for England and Wales in 2012 showed the biggest increase in the number of marriages was for men and women aged 65 – 69, rising 25 per cent and 21 per cent, respectively.
Trusts become a vital tool for modern families, to cope with children from different relationships, step-children and age-gap relationships. Trusts can help to give control to clients and to make sure the right people receive money at the right point in time.
Even HMRC’s own Research Report 25 notes that tax is usually a secondary consideration in using a trust:
“The main motivation for setting up a trust appears to be related to control of assets, rather than tax planning as found in both the in-depth interviews and the survey of trustees. While tax planning is important for some, it is usually cited second…”
The net of the disclosure regime widens
HMRC’s proposed extension of the Disclosure of Tax Avoidance Schemes (Dotas) rules could impact mainstream family situations with its proposed extension of the Dotas regime.
This regime requires ‘scheme promoters’ to notify HMRC of a new scheme, which is then allocated a scheme reference number (SRN). Clients who have used the scheme need to declare this SRN in their tax return by quoting it in box 19 on this form.
Just to emphasise – this is nothing to do with whether any tax is due or not. Simply by virtue of using a scheme which has a SRN, a client would have to file a personal tax return, quoting the SRN number.
For basic rate taxpayers, this could be the only reason they need to file a tax return.
This information-gathering exercise is intended to be an alert system to HMRC, so any perceived abuse of the tax rules can be reviewed and action taken if required.
Trusts used with life and pension policies
For several years, the Dotas regime has been irrelevant for mainstream trusts which hold life or pension policies. The official HMRC guidance lists a number of well-known trusts which don’t need to be disclosed, since they are known to HMRC, i.e. they are ‘grandfathered’.
This seems set to change, if the proposals in the latest consultation go through unchanged, since it is proposed to remove the grandfathering rule.
Clarity is now needed around the scope of the new rules – will your clients who use discounted gift trusts or loan trusts, for example, find themselves with new tax compliance on their hands? On my reading of the proposals, this could be the case.
So the priority must be to make sure the mainstream use of trusts by families for sound family financial planning reasons is preserved. The majority of people do not file a tax return. Should that change, because they have used a trust with their life or pension policy, this creates an administrative burden.
It also creates new demands on HMRC if thousands of new tax returns need to be submitted quoting SRN numbers which relate to well-known life or pension policy trusts, when no inheritance tax is even due. There must be a better solution.
What lies ahead?
The consultation closes on 23 October. It’s possible new rules could be in force for April 2015, but the timescale isn’t clear yet. I look forward to an early meeting with HMRC to share our insight into how trusts are used in mainstream situations and explore how it may be possible to shape the new rules in a more proportionate way.
Julie Hutchison is family finance expert at Standard Life