We now come to clause 7, which covers settlors returning excess payments to trustees. It takes us to a different and equally exciting part of tax law that many Committee members have been waiting for—I hope for not too long. For those who are unfamiliar with such arrangements, the settlor is the donor or trustor who gives money or assets to trustees. They are the person who originally created the trust. Some trusts are established to benefit others, such as children or other individuals or organisations, but some are set up for the benefit of the settlor—a settlor-interested trust.
The clause seems to iron out an anomaly in the circular nature of the taxation of settlors who may have interests in trusts to ensure that double taxation does not occur. That is entirely fair. However, there are various categories of trust for a panoply of family and life circumstances, many of which are wholly understandable and laudable—for example, when the beneficiaries are vulnerable or incapable of governing their own financial best interests at a given point. However, sometimes the dusty and arcane rules surrounding trust tax law may be used as a mechanism for the avoidance of significant sums of tax on income that might ordinarily be paid to the Exchequer, but for the clever legal and accountancy planning that more affluent people are able to obtain. I accept that it is for the Treasury continuously to define the rules to ensure that abuses are clamped down, but some doubts remain about the regime of trust rules in general.
Does the Minister share my belief and that voiced by the hon. Member for Dundee East (Stewart Hosie), who is not a member of the Committee, but raised the matter on Second Reading, that those who have very small and modest trust sums, perhaps in safeguard for vulnerable individuals, may be unwittingly drawn into complex self-assessment tax arrangements that could incur significant costs? What is the Minister’s opinion of the proportionality in terms of the administrative burden falling on those small trusts for such individuals, and what can he do to relieve the burden on those trusts?
In contrast, does the Minister believe that wealthy individuals whom ordinary members of the public would not consider to be deserving of special trust protection may benefit unfairly? Is his Department looking at trust tax law arrangements to tighten up a perceived unfairness, and how will he ensure that HMRC continuously reviews the laws to ensure that abuses are clamped down upon?
Finally, I am told that the Law Society has looked at the framing of the legislation, and it believes that concerns remain about the clause’s workability. It understands that other representative bodies, particularly the Association of Corporate Trustees, have called for the clause to be withdrawn. Given those opinions expressed by bodies outside his Department and Parliament, what is his response to the Law Society, and how might its concerns be addressed?
This clause provides for a minor technical adjustment to the administration of settlor-interested trusts. It will oblige settlors to pay to trustees any repayments of tax they receive in connection with the trust income, tax that originally had been paid in effect by those trustees. A settlor-interested trust is a trust set up by a person—the settlor—who puts property into it for the benefit of people, which may include themselves. For income tax purposes, the trust income is treated as that of the settlor, but tax is paid initially by the trustees at a special trust rate. If the settlor pays income tax at a lower rate than that of the trustees, he may be entitled to a repayment of tax on the trust income treated as his.
The trust rate increased to 50% from April 2010 and, with many settlors having a tax rate of 40%, that type of repayment will become more common. Settlors currently have to refund to the trustees any tax repayments they get as a result of offsetting an allowance or relief against their trust income, but they do not have to refund repayments obtained in respect of their personal tax rate being lower than the trust rate.
Clause 7 will introduce a consistent treatment for all repayments making sure that, no matter what the reason for the repayment, settlors will have to refund the money to the trustees.
As I was saying, clause 7 will introduce consistent treatment for all repayments, making sure that no matter what the reason for the repayment is, settlors will have to refund the money to the trustees. It will also ensure that, where settlors make the repayments to the trustees, there are no unwelcome inheritance tax charges. Essentially, since the settlor will be legally obliged to refund the tax to the trustees, he cannot be regarded as reducing the value of his estate when he makes the payment, so no inheritance tax is due.
Consultation on a draft of the clause produced some useful feedback from professional bodies on how settlors and trustees share information. That is necessary to enable trustees to perform their fiduciary duty of collecting payments properly due to them. In most cases, normal communication between the settlor and trustee will mean that there will be no problems, but we accept that there will be some cases where trustees will want greater certainty.
The hon. Member for Nottingham East raised concerns about the administrative burden, which was raised in the consultation. It is worth saying that settlors who do not make self-assessment tax returns can choose whether to make a repayment claim. We think that most will make one, especially where the sums are significant. The amount of the repayment is fairly straightforward to calculate, and HMRC will be issuing guidance to help people. Settlors and trustees often have a close relationship, as I said, so there should not be any difficulty in agreeing the amount to be paid, in the same way that trustees have little difficulty in agreeing, under the current rules, the amount a settlor is repaid as a result of applying their reliefs and allowances. Where greater certainty is needed, HMRC will be able to provide settlors with a certificate, confirming the amount of tax repayment they obtain in relation to the trust income.
It is worth pointing out that if the measure were not introduced, trustees would find themselves with unintended inheritance tax liabilities. Professional bodies told us that the main area of concern was certainty as to whether a repayment had been obtained and of what amount. That was, as I said, a point that came up in the consultation. We have addressed it by introducing the certification procedure, which followed the consultation. Other issues have been raised, such as regarding the treatment of losses, but they are not new, and HMRC will be working with professional bodies to ensure a common understanding of the existing rules. We are of course always willing to hear representations on how the system may be further improved, but we have responded to the concerns about the administrative burden during the consultation.
The hon. Gentleman also raised concerns about avoidance in the area, and whether there is more that we need to do to overhaul the trust regime. Some members of the Committee may recall that significant changes were made to the regime for the taxation of trusts in 2006. I remember it well, having served on the Committee that considered that year’s Finance Bill, and it was not entirely a happy process. The Government want to avoid constant tinkering with the tax system, which leads to complexity and uncertainty. We do not have any plans to make significant changes in the area, but we are always willing to listen to representations as part of the usual Budget process, and the Government are keen to reduce tax avoidance at every opportunity.
The clause has been adjusted to include a procedure for the settlor to require HMRC to provide him with a certificate confirming the amount of repayment of tax he obtains with trust income. In doing so, we have met many of the concerns that have been raised in this area.
Clearly there have been representations and further changes made since the Bill was published in its original form. Nevertheless, the Law Society still seems to be of the view—and has given its view—that the measure should be withdrawn for some kind of redrafting. Does the Minister feel that that is not appropriate?