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Comments from ACCA
November 2004

ACCA is pleased to comment on this second consultation on trusts. Our comments are brief as this paper revisits many of the issues we have already commented on in the response to the first paper.

Our comments follow the same order as the consultation paper.

Introduction
1. We support the view expressed in the paper that a trust should neither lower the level of tax or raise the level of tax by it being in existence. This applies especially where the beneficiary has a trust imposed upon them by statute.
   
   
2. While we agree with many of the Government's aspirations for a fair and simple tax system for trusts we wonder whether the full commitment is really there to give relief to the vulnerable without increasing the level of taxation on those not considered to be in that category.
   
   
   Trusts For The Most Vulnerable
   
   
3. We do not disagree with the idea of an election being available to those considered, to be in this category so that the trust rates are based upon the individuals tax rates.
   
   
4. We do not consider the proposal at 1.6 to be sensible. A minor who is entitled to the favourable terms for the most vulnerable should not, as a pre-qualifying requirement, be entitled to all the assets at 18. This would be a recipe for disaster as the individual could not be considered mature enough to handle significant levels of wealth. The age of 25 would be more appropriate.
   
   
   Tax Effects of Elections
   
   
5. There will be a number of practical difficulties with the election which need to be carefully thought through. In the era of self-assessment there will be an information exchange issue. Especially as we appreciate that most who will be eligible to the election will be in a repayment situation.
   
   
6. In addition the trustees will need to access the individual's tax details in order to correctly calculate the tax obligations of the trust. It may be necessary to facilitate the practical operation of this election by having a 64-8 type information sharing power attached to it so that the trustees are automatically copied in to any tax related information.
   
   
   Time Limit for Elections
   
   
7. We consider that two years is reasonable and most trusts would elect at the time they are set up. We would also consider that the full year election period should apply to existing trusts, hence they would have until April 2007 rather than the two years from the new RAT of April 2004.
   
   
   Basic Rate Band
   
   
8. While we appreciate the simplification offered by the basic rate band of £500 we consider this should in fact be at least £1000, especially given the significant tax rise which applies above that band.
   
   
   Time Limits
   
   
9. The proposed time limit is reasonable and, given that there will inevitably be a mismatch of the income due and tax payable, a pragmatic time limit.
   
   
10. 3.10 indicates that there will be anti-avoidance legislation to prevent passing income around inter-linked trusts. Such legislation needs to be correctly drafted and proportionate.
    
    
     The Tax Pool
    
    
11. We would not welcome the abolition of the tax pool. The real intention behind the abolition is to enable the Government to start enjoying tax at the new RAT of 40% sooner than it otherwise would.
    
    
    Definition of Trust
    
    
12. We are generally satisfied with the proposed IHTA definition for a settlement.
    
    
13. We are not supportive of the proposed definition for residence of the trust. By aligning the definition with the Income Tax rules we are in danger of capturing all income and capital gains from a trust even where the settlor is non-UK domiciled. This will lead to many trusts which are caught by this rule change relocating outside the UK . The rules need to be aligned so that the tax status of the settlor is fully taken in to account. Section 69(2) TCGA 1992 seems to us to provide a better alignment with the settlors' UK tax status.
    
    
     Professional Trustees
    
    
14. The proposal to drop the favourable CGT treatment to professional trustees is not wise. While it may be true that many of these trustees are able to arrive at the current tax treatment by the involvement of an overseas professional firm we do not consider this always to be the case or possible. The change to the current treatment will be counter-productive to the UK 's interests.

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