Daniel Watson discusses how it is time to treat trusts with neutrality and fairness in the FTAdviser

Daniel’s article was published in the FT Adviser, 8 May 2019, and can be seen here.

Daniel Watson, Associate in our Private Client department, explores the UK government’s ongoing consultation on the taxation of trusts, which aims to align the system with the principles of transparency, fairness, neutrality, and simplicity.

The consultation, launched in 2018, focuses particularly on the inheritance tax (IHT) treatment of private trusts such as life interest trusts, discretionary trusts, and vulnerable beneficiary trusts. While the government seeks to ensure tax neutrality – where tax rules neither encourage nor discourage the use of trusts – the current regime often disincentivises their use due to complexity and high tax burdens.

Trusts are frequently established for legitimate purposes like asset protection, family planning, and care for vulnerable individuals, rather than for tax avoidance.

The article highlights that the current IHT regime, particularly the relevant property regime, imposes significant charges on lifetime interest-in-possession and discretionary trusts, including entry, periodic, and exit charges. These can be especially burdensome for trusts holding illiquid assets.

The 2006 reforms, which brought lifetime IIP trusts into this regime, are criticised for being neither fair nor neutral, as they treat such trusts less favourably than outright gifts, despite similar intentions. Vulnerable beneficiary trusts also face challenges due to a narrow definition of ‘vulnerable person’ and complex compliance requirements.

Daniel argues for reform in these areas, suggesting that lifetime IIP trusts should be treated as potentially exempt transfers (PETs) and that the definition of vulnerable beneficiaries should be broadened. Such changes would better reflect the consultation’s guiding principles and support the legitimate use of trusts in estate and financial planning.

Read the full article on the FT Adviser website [external link].