Chris Bara
HMRC Trusts, IHT, and CGT Policy
100 Parliament Street
London SW1A 2BQ
Dear Mr. Bara,

In the March 2010 Budget, proposals were included for the adjustment of income tax between settlors and trustees, as referred to in paragraph 5.96 of “Securing the recovery” and as set out in more detail in BN30.

The proposal is to extend the circumstances in which a settlor is required to pass on to the trustee a repayment of tax to which they are entitled in respect of the trust income. At present the circumstances are limited by s.646 (4) Income Tax (Trading and Other Income) Act 2005, only to repayments received by the settlor in respect of “an allowance or relief”. The proposal, effective from 6 April 2010, is that the amount to be paid to the trustee will be extended to include all repayments of tax received by settlors in relation to trust income.

The language used clearly shows the intention that there will be a change in the law effective 6 April 2010, rather than merely a clarification of the terms of s.646 (4).

On the basis the trust rate (under s.9 Income tax Act 2007) applicable to trusts will be 50%, and the dividend trust rate 42.5%, for the tax year 2010/2011 and subsequent tax years, unless the settlor’s marginal rate of tax is 50%, or the trust income is wholly or substantially within the trustee’s first slice of trust rate income (as defined in s.491/2 Income Tax Act 2007), it is likely that the settlor will be entitled to a repayment of income tax paid by the trustees of a relevant trust.

If the settlor is entitled to a repayment of tax, then the trustee will be under a duty to secure the benefit of that repayment for the trust.

The amount of any repayment will be dependant upon the settlor’s individual circumstances. In many instances, until they have made enquiries, the trustee will not know if the repayment is likely to be such that it is appropriate to take action to recover the sum to which the settlor is entitled. Such action could include persuading the settlor to submit a claim so as to obtain the repayment to which they are entitled.

Whilst a trustee might to apply to HMRC for a certificate specifying the amount of any repayment, under s.646 (2) it is only the settlor who might apply for such a certificate, which would seem to be the correct position mindful of the Data Protection rules. Accordingly, it is not until the settlor’s tax return has been assessed and (s)he obtained a certificate that either (s)he or the trustee will know to what extent any benefit accrues to the trust.

The proposed changes will necessitate not only settlors having to apply for a tax repayment in most trusts which are settlor assessable, but in each instance will also require HMRC to issue a certificate under s.646 (2).

At present, we understand that many who might be subject to the settlor assessable rules do not complete an annual tax return, and so the proposed changes will result in a potentially significant increase in workload for HMRC.

Based upon a straw poll of the representatives on the Private Trusts Committee of TACT (The Association of Corporate Trustees), their organisations act as trustee for over 2,500 settlor assessable trusts which will be affected by the proposals. Members of TACT have only a small share of the market of such trusts, the trustees of which will often be family members, solicitors or accountants. On the basis of TACT members having a 5% share of the market, this could mean 50,000 returns will need to be submitted annually, and a similar number of certificates under s.646 (2) issued.

In the light of the current level of income returns in trusts, it is unlikely that the refunds received will be of a substantial amount, and could be largely swallowed up by the costs of the trustees pursuing the repayments. This ignores the cost impact on HMRC of having to check the extra returns and issue the certificates.

Whilst we accept that the proposals are well intentioned, in the overall scheme the amounts involved will be modest and the work involved to process could be significant. TACT therefore asks that the proposal be withdrawn, especially as no benefit accrues to the Exchequer as a result of implementing the proposals.

Yours Sincerely

W P Cotton