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HMRC proposes widening exemption for small trusts

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HMRC is proposing to widen a simplification that keeps small trusts and estates out of paying tax and self-assessment. But any benefits for trusts are likely to be offset by new Trust Registration Service requirements.

10th Jun 2022
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In a welcome move, HMRC is proposing to widen a simplification that keeps small trusts and estates out of paying tax and self-assessment. However, for trusts, any benefit of simplification here will likely be quashed by new Trust Registration Service (TRS) requirements.

Six years ago we had a major shakeup in the taxation of interest and dividends – instead of tax at basic rate being deducted (or deemed to have been deducted) at source, the government decided that interest and dividends should be paid gross and individuals would be given tax-free allowances instead, which would be tapered for higher earners.

Since similar allowances were not introduced for estates or trusts, one consequence of the change was that suddenly a lot of low-income estates and trusts found themselves needing to complete tax returns when previously the collection at source method had covered their tax liabilities. HMRC therefore introduced a limited, non-statutory arrangement exempting trusts or estates with an income tax liability of less than £100 arising purely from receipt of interest from having to complete a return. 

Broader arrangement

This non-statutory concession has been renewed on an annual basis since then, but HMRC is now consulting on proposals to legislate a slightly broader arrangement that would allow a trust or estate with total income of less than a certain de minimis amount not to have to report or pay tax. This wider de minimis test would therefore not only cover bank interest but also helpfully include dividend income or even income from land and property. This could be useful where there are small receipts. 

The consultation states that the de minimis amount is to be determined, but hints at an amount of £500. This is broadly the income equivalent of the existing £100 limit on the tax liability that can be ignored. As long as the limit is kept under review over time, this doesn’t seem a bad starting point.  

Estate benefits 

This new approach is likely to be most beneficial for estates of the deceased, particularly straightforward estates comprising a main residence plus some modest savings and investments. Association of Taxation Technicians (ATT) members tell me that they find the existing rules a helpful and practical approach and hopefully broadening the range of permitted income sources will only increase the benefits.

The proposals do have a cliff edge. If the de minimis is set at £500, an estate with just one extra pound over the threshold will tip from being exempt to paying tax on the full £501. Normally we would flag cliff edges as a potential source of unintended consequences. However, the line does need to be drawn somewhere, and a clear cut-off is, at least, simple to understand. Setting the de minimis at an income level, rather than on a tax liability should also be clearer for people to understand and record in the event of future enquiry. 

Low-income trusts

I expect that there are generally few trusts with a sufficiently low income to benefit from these changes, but no doubt those that can benefit will find it helpful. If nothing else, converting the existing non-statutory concession into legislation will provide certainty that they will continue to benefit from the exemption from filing in the future.

The consultation highlights that for discretionary trusts within income under the de minimis, obviously the tax pool won’t build up from year to year as no tax is being paid. This means that when a distribution is made, the trust will need to pay enough tax at that point to frank the distributions. HMRC would like to know if this will cause issues. In my view, it seems a minor quibble in the context of an otherwise simplifying measure. 

TRS deadline 

Of more concern for many trusts right now is likely to be the looming deadline date for registration on the TRS. This was set up in 2017 and initially only trusts that paid certain taxes were required to be on the register. HMRC confirmed that trusts could be treated as non-taxable if they benefited from the current concession and didn’t pay tax as they had a liability of less than £100 on interest.

Since then the scope of the register has been expanded, and all non-taxable trusts in existence at 6 October 2020 need to be on the register by 1 September 2022 unless they fall into a long, but complex, list of exclusions. Guidance on the exclusions can be found in HMRC’s manuals, but be warned that some aspects are still being worked out and further clarifications are expected even as we approach the deadline. (For example, confirmation that Junior ISAs are out of scope was only received in mid-April.)

Trustees are expected either to register online themselves or appoint an agent via a digital handshake to record details of the trust’s beneficial owners including settlor(s), trustees and beneficiaries. Reports from members suggest this is a fairly onerous process and is likely to be much more of a burden in coming years for small trusts than dealing with self-assessment issues.

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Replies (3)

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By ireallyshouldknowthisbut
10th Jun 2022 09:33

I deal with a number of small one off trusts (usually as a result of probate) and the amount of work required on a small trust to register it and pay often a few hundred pounds in tax is ridiculous. We need to go back to having a simple system of being able to write in and pay the tax if its under £1,000.

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By Catherine Newman
10th Jun 2022 12:16

I have been asked by a Financial Adviser to register his Trusts. He works for a large firm of Financial Advisers and they were due to have a meeting about how to go about it.

I have asked the GDPR question and asked who is actually engaging me. My question is "How do you even start to log on". Do you make the initial move or do the Trustees and you then take over?

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Morph
By kevinringer
14th Jun 2022 11:22

What is the TRS authorisation process for digitally-excluded trustees?

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