Settlements: anti-avoidance etc

Part of Finance (No. 2) Bill – in a Public Bill Committee am 10:00 am ar 16 Ionawr 2018.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 10:00, 16 Ionawr 2018

I should have known that you were several steps ahead of me, Sir Roger. I totally understand and will therefore speak to the clause.

Clause 35 seeks to safeguard the integrity of our tax system by ensuring that it is not possible for an individual with an offshore trust to avoid paying UK tax on payments from that trust. The UK already has extensive anti-avoidance legislation in place to prevent individuals who hold offshore trusts from being able to avoid paying income tax or capital gains tax on the gains from those settlements. The UK’s far-reaching anti-avoidance rules mean that a UK-domiciled individual who sets up an offshore trust will pay tax on income and gains in that trust as they arise if they have any entitlement to the trust income or the underlying assets. That means that using an offshore trust does not deliver any tax advantage for most people living in the United Kingdom.

However, there are a small number of people who set up or benefit from an offshore trust, where tax is not due on income and gains as they arise in the trust; instead, tax is charged when moneys or benefits are taken from the trust. Typically these people are foreign domiciliaries—often referred to as non-doms—although there will be certain circumstances in which UK domiciles pay tax only when moneys or benefits are withdrawn, such as when the individual who set up the trust has died.

Where tax is charged on money or benefits taken from the trust, it is important that the legislation is effective in imposing a tax charge on the money or the benefit that is taken. However, a number of loopholes in these rules allow trustees to plan their arrangements carefully so that the beneficiary can obtain money or benefits without paying UK tax. I do not think that our tax system should allow people to live in the UK and not pay their fair share, and the Government, through this clause, are taking significant action against this contrived tax planning.

The first loophole removed by clause 35 concerns the way capital gains that accrue to offshore trusts are attributed to trust beneficiaries. Currently, UK resident beneficiaries are taxed when they receive a capital payment that results from the capital gain in the trust. However, UK beneficiaries can avoid tax on sums received from the trust if there are other beneficiaries of the trust and the trustees carefully plan how payments are made. This is because the current rules allow payments made to a beneficiary who is not UK-resident to be set against the gain that is taxed when later payments are made to UK residents. In some cases, this can mean that payments to UK beneficiaries are not taxed at all. Clause 35 stops this by no longer allowing payments made to non-residents to be treated as having been made from the trust’s capital gains. A similar rule already exists for trust income.

The second change deals with a capital gains tax loophole where an offshore trust makes capital payments to a close family member of the UK resident who set up the trust. Under the current rules, the fact that the payment is not directly given to the individual would mean they avoid any UK tax due on the payment or benefit from the trust. The new rules close this opportunity by treating such payments as if they were made directly to the UK resident who set up the trust, who will pay tax on the payment or benefit as if they had received it directly.

The third loophole that this clause closes is when a capital payment is made as part of an arrangement that routes the payment through a third party. Under the arrangement, the third party who receives the payment or benefit from the trust makes an onward gift of the sum received to the intended beneficiary. As things stand, this can enable the ultimate beneficiary to avoid paying tax on the payment or benefit as they should have done if made to them directly. The changes to the rules will prevent such arrangements from being effective for tax purposes by taxing the recipient of the gift as if the capital payment was made directly from the trust to them in the first instance. These rules apply if the recipient is resident in the United Kingdom, but it means that they are not able to avoid paying UK tax on income and gains made by the trust simply by routing payments through a third party.

Minor Government amendments to schedule 10— Government amendments 2, 5 to 32, and 51 to 53—amend new provisions in the Income Tax (Trading and Other Income) Act 2005 to ensure that they work as intended. The amendments clarify that the provisions apply to both capital and income benefits and ensure that they will not result in income tax charges on non-UK resident beneficiaries. These amendments also ensure that no double tax charges arise and clarify how items will be deducted in respect of earlier charges under either the settlements benefits code or the transfer of assets code.

I will now turn to the Opposition amendments. Amendment 63 proposes the creation of a register of trust beneficiaries, settlors and trustees, with the register of trustees being public. I do not think there is any need to create a new register. From 26 June last year, any trust that generates a UK tax liability, regardless of where it is established, is required to register with HMRC. Trustees are required to provide detailed information about the trustees, settlors, beneficiaries and trust assets. This information is accessible to HMRC and law enforcement authorities, enabling them to draw connections between parties associated with relevant trusts. For compliance purposes, HMRC has the information it requires. The Government also believe strongly in taxpayer confidentiality. Making this register public would jeopardise that principle and it is something to which the Government cannot agree. In addition, HMRC already publishes data on a number of trusts with an income tax and/or capital gains tax liability during the year.

Amendment 62 seeks to introduce a review within six months of the date of this Bill being passed to consider the effects of the changes to the schedule, particularly the effects on tax avoidance in trusts. This clause is explicitly directed at reducing tax avoidance through trusts. It is legislation that has been consulted upon, having been published in draft in September, and the Government are confident that it will close the loopholes it targets. I therefore ask the Opposition not to press the amendment. I commend the clause and the Government’s amendments to the Committee.