The trust rules on settlors and interest exist to ensure that the right amount of tax is paid. As I have explained, settlors have the power to claim reimbursement from trustees for any tax that they pay. Allowing settlors to set trust losses against personal gains would mean that a settlor would benefit at the expense of the beneficiaries of a trust. I shall explain that later.
At the moment, trustees' losses are set against their gains. That reduces the sum with which trustees have to reimburse a settlor where a settlor pays tax on an attributed gain, which leaves more for beneficiaries. Under the proposals, the losses would personally benefit a settlor, and more would have to be paid out of that trust's funds to reimburse a settlor for attributed gains, which would leave less money for beneficiaries. That cannot be right. In effect, the amendments would give a settlor the power to benefit from a trust in a way not envisaged by the original deed of settlement.
It will come as no surprise to the Committee that in this very complex area of the tax code, amendments Nos. 52 and 53 and new schedule 1 are not free of errors, some of which would open up new tax-avoidance possibilities. The proposals would, for example, allow untapered losses to be set off against amounts attributed in respect of tapered gains. It is quite unfair to obtain such an advantage just by involving a trust in the process. The amendments and new schedule are wrong in principle, would have a significant cost and would give rise to tax avoidance, and I therefore ask the Committee to reject them.