Clause 29 - Estates in administration and trusts

Finance (No. 2) Bill – in a Public Bill Committee at 10:30 am on 16 May 2023.

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Question proposed, That the clause stand part of the Bill.

Photo of Esther McVey Esther McVey Conservative, Tatton

With this it will be convenient to discuss the following:

Amendment 4, in schedule 2, page 291, line 38, at end insert—

“(za) the property comprised in the settlement is not held for a pensions purpose within the meaning of paragraph 7(3) of Schedule 1C to TCGA 1992 (property comprised in settlements held for a pensions purpose);”

This amendment would mean that a pensions settlement could not be a “qualifying settlement” for the purposes of section 24B of the Income Tax Act 2007 (being inserted by the Bill) or a “relevant settlement” in respect of which the conditions in subsection (9) of that section could be met.

That schedule 2 be the Second schedule to the Bill.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

Clause 29 and schedule 2 make changes to provide greater certainty and simpler tax administration for trusts and estates by legislating and extending an existing concession. The changes prevent trusts and estates having to report small amounts of income tax to HMRC, make tax calculations more straightforward for some trustees, and provide technical clarifications for estate beneficiaries.

Trustees of trusts and personal representatives of deceased persons’ estates do not have tax allowances in the same way that individuals do. As a result, they must send HMRC a self-assessment return for all income, even small amounts. HMRC operates a narrow concession so that trustees and personal representatives do not have to report small amounts of untaxed savings income.

Last year, HMRC consulted on proposals to formalise and extend the concession, and on related reforms that would apply to smaller trusts and estates. Respondents broadly welcomed the proposals. We published a summary of the responses to the consultation at the spring Budget and are proposing legislation in line with that publication.

The changes made by clause 29 and schedule 2 will provide greater certainty and simpler tax administration for trusts and estates. Part 1 of the schedule makes technical amendments relating to income distributed from a deceased person’s estate to a beneficiary. Those ensure that the beneficiary’s tax credits operate correctly, and that a person can use their savings allowance against distributed savings income.

Part 2 of the schedule introduces a tax-free amount for trusts and estates with an income of £500 or less in a tax year. That frees smaller trusts, and around one in every seven estates with income, from paying and reporting income tax. The tax-free treatment for estate income is also passed on to the estate’s beneficiaries. For groups of trusts, the £500 limit will be reduced to a minimum of £100 per trust. That will prevent individuals from splitting up their investments into multiple small trusts to build up an inappropriate amount of tax-free income. We have tabled amendment 4 to simplify that rule. It excludes certain pension schemes from consideration when determining the amount of any reduction to a trust’s £500 tax-free amount.

Part 3 of the schedule removes the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of income for accumulation trusts and discretionary trusts. Reducing the number of tax rates in this way will make tax calculations more straightforward. It also avoids complications with the new tax-free limit, which is better targeted at low-income trusts. The change will take about 8,000 trusts and estates out of income tax and reporting, and simplify how tax applies to bereaved beneficiaries.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 10:45, 16 May 2023

As we have heard from the Minister, clause 29 introduces schedule 2, which makes provisions relating to the taxation of estates in administration and trusts. We understand that the clause implements the Government’s response to the “Income tax: Low income trusts and estates” consultation conducted by HMRC between April and July 2022. The response was published at the time of the spring Budget. The clause seeks to legislate for an existing concession on the administration of tax for trusts and estates.

We will not oppose this measure, but I ask the Minister to address concerns raised by the Chartered Institute of Taxation about the impact of this clause on trusts. It believes that the legislation takes a practical approach on estates, which will benefit both the personal representatives of the deceased and their beneficiaries. However, it believes there is less simplification in respect of trusts with low incomes, and that for some people, the administrative burden will actually increase. The institute has concerns about the way that trust income is taxed in two stages. First, the trustees report the trust’s income and pay tax on it. Secondly, when income is distributed to beneficiaries, they must report the income and pay any tax that remains due after credit has been given for the tax that was taken at the first stage.

The Chartered Institute of Taxation draws attention to the fact that although a £500 threshold, like that for estates income, is applied to the income accruing to the trustees of a settlement, that does not exempt the income in the hands of the beneficiaries. Where trustees have no liability to report or pay, basic rate taxpayers will have to pay the basic rate tax due on their income from the trust. Currently, they may not be filing a tax return at all, as their basic rate liability will have been met by the tax deducted by the trustees; this measure may mean that they now have to file a tax return. I would welcome the Minister’s thoughts on that point, and would be grateful for a response to CIOT’s concern that this measure, while described as a simplification, could impact on often vulnerable beneficiaries receiving modest amounts of income, who will now have greater compliance burdens.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (Cabinet Office)

I have a quick question on Government amendment 4. Will it change the application of schedule 2 and proposed new schedule 1C to the Taxation of Chargeable Gains Act 1992, or does it simply clarify what is intended anyway under those schedules? The amendment specifically mentions the property not being held for pensions purposes. I am trying to understand whether that was the original intention, or whether the amendment changes the intent of schedule 2 and of schedule 1 to the TCGA.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

On the simplification point, the replacement of the lower-rate band with the new tax-free amount supports our long-standing goal of a modern and simpler tax system. This is a simplification for low-income discretionary trusts, as income within the tax-free amount will no longer be taxed as it arises. The change also simplifies calculations when income distributions are made. The consultation last year outlined that where discretionary trusts make income distributions, the existing 45% credit given to beneficiaries with that income would remain, as would the continued need for trustees to top up their payments to HMRC to match that credit when the distribution is made. I am told that the Chartered Institute of Taxation agreed with that proposition, and the Association of Taxation Technicians saw that as largely a question of timing and did not see a particular issue with the principle.

The hon. Member for Ealing North asked about vulnerable beneficiary trusts. The measures are a simplification for those trusts, as for any other low-income trust, as there will no longer be the need to elect to have income taxed as if for vulnerable beneficiaries. Instead, the income will simply not be taxed as it arises. Most vulnerable beneficiary trusts are, indeed, discretionary trusts, and as I said earlier, both the Chartered Institute of Taxation and the Association of Taxation Technicians have opined on this. The measure does not affect the need for trust beneficiaries to consider their tax reliability on their trust income. On the hon. Member for Aberdeen North’s question, the amendment clarifies our intentions.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

I thank the Minister for her response to my point. For clarity, my understanding of the Chartered Institute of Taxation’s point was that where trustees have no liability to report or pay, the beneficiaries, if they are basic-rate taxpayers, may still have basic rate income tax due on their income from the trust. I may have misunderstood, but did she say that beneficiaries will not be liable to income tax? Can she clarify that point?

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

I will repeat exactly what I said for the hon. Gentleman, slowly: the measure does not affect the need for trust beneficiaries to consider their tax reliability on trust income that they receive.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.