Wealthy taxpayers who rely on trusts to avoid paying tax on their fortunes could come under attack from HM Revenue & Customs.
The tax authority is concerned that families that can afford lawyers and accountants to arrange their financial affairs have lower inheritance tax bills than they should.
To look at if the law should be changed, HMRC has published wide-ranging research of trusts to find out if they are fair and not just a way of avoiding tax.
Trusts set up as part of estate planning exercises to minimise inheritance tax are specific targets for the consultation.
Why families use trusts
HMRC has explored why families set up UK trusts and found:
- People set up trusts to make sure poor financial decisions and lifetime events like divorce did not impact their assets
- Trusts are tax avoidance vehicles, particularly to reduce inheritance tax and care home fees for the elderly
- Trusts allow people to control their assets after giving the benefit away to others
- Trusts helped families adapt their wealth to changing circumstances
For offshore trusts, privacy was a major factor as a trust guarantees anonymity.
Other factors that came into play included ease of controlling assets across borders and tax avoidance.
“Agents tended to emphasise the personal reasons that settlors had for setting up UK based trusts and said that there were no tax benefits in having one. While personal factors were important, settlors also placed importance on perceived tax benefits, and on reducing IHT through use of the IHT nil rate band,” said the report.
Not averse to paying tax
“Reducing IHT liability was a key driver for settlors in setting up trusts. Reductions in CGT and IT liability were more commonly perceived by settlors as benefits to having a trust, rather than a driver to set up a trust.
“Agents who dealt with UK based trusts believed that the use of offshore trusts was more commonly motivated by tax planning than UK based trusts.”
Tax professionals told researchers that wealthy families were turning way from offshore trusts due to disclosure laws in the UK and other countries.
“Clients with assets offshore may be encouraged to bring them onshore if the UK tax regime was less punitive, said agents. Rates for IHT and CGT were particular areas of focus. The view of agents was clients were not averse to paying tax but they were averse to paying the level required in the UK,” said the report.