On HMRC’s Charges on Trusts consultation

Reading HMRC’s on-going consultation ‘Simplifying Charges on Trusts’ does not give much hope for simplification.

Of the key proposals, ignoring previous lifetime transfers and non-relevant property in relation to trust exits and ten year charges, is clearly attractive. However, while the idea of splitting the nil rate band between every trust a settlor creates -even insurance trusts- may be simple in abstract, but it would be a nightmare for trustees in practice. Even if only trusts created after, say, April 2014 are to be taken into account, in future life would become increasingly complicated for trustees.

Whilst the current rules are complex, they are prescriptive and trustees have the option of asking HMRC to calculate the tax due. Under the proposals, the onus will be on the trustees to do the calculation and to file the necessary return by 31 October, following the tax year as there will be no option to file online. It would be preferable to bring the position wholly into line with self-assessment, as it applies for income and gains tax purposes, so that trustees would have the option of filing before 31 October following the end of the relevant tax year with HMRC calculating the tax or by 31 January, with the trustees calculating the tax.

STEP is completely supportive of simplification but these proposals do not appear to meet that objective.

Wendy Walton TEP, Chair of STEP Technical Committee for England and Wales

G-20 Summit – global automatic tax information exchange by 2014?

For the press, the most eye-catching item on the agenda at the recent G-20 Finance Ministers Summit in St Petersburg was the (still rather vague) proposal to clamp down on corporate tax avoidance by tackling base erosion and profit shifting. For many STEP members, however, perhaps the most important item was the (very firm) instruction to the OECD that it should produce a clear timeline for completing work on a single global standard for automatic information exchange in 2014 in time for the next G-20 summit in October.

The proposed OECD global standard is to be largely based on the FATCA Model 1 IGA model. If we therefore put the G-20/OECD initiative alongside the recent statement from the US (that  delayed FATCA reporting for a further six months and also seemed to recognise that FATCA Model 1 IGAs seemed to offer a much easier solution to everyone than raw FATCA) it becomes relatively easy to envisage that in reality rather than the introduction of unilateral FATCA reporting to be followed quickly by a new system of OECD multilateral FATCA-style reporting, we will actually see a single move globally to automatic exchange of information (AEOI), perhaps in 2015 or 2016.

Multilateral AEOI has always been the long-term objective of bodies such as the OECD. But there now seem to be growing numbers putting their weight behind the OECD model, including most recently the EU Commission. With the US also showing (some might say rare) flexibility regarding the introduction of its own (unilateral) AEOI model, it may be that consensus has now been built for a quick move to global AEOI in the next 24 months.

George Hodgson, STEP Deputy Chief Executive

The European FATCA

The EU Commission held a full day meeting with experts to explain its plans for developing full multilateral automatic exchange of tax information across the EU. Of, course the EU already has the Savings Tax Directive, but that only covers interest income, and plans to extend it have long been held up by objections from Belgium, Luxembourg and Austria that they were not prepared to agree to the extension until certain issues, like automatic information exchange with Switzerland and the treatment of ‘Anglo-Saxon’ trusts had been resolved.

The EU has opened discussion with Switzerland, and we were in Brussels a couple of weeks ago making a major presentation on trusts (to all 27 Member States, including Belgium, Luxembourg and Austria), so the Savings Tax Directive project is inching forward. In the meanwhile, however, it is clear that politically the EU is keen to develop its own version of FATCA as quickly as possible. Its chosen way of doing this is to extend the Administrative Co-operation Directive (DAC, another acronym for the lexicon!) to cover all payments and account values by 2015.

The Commission objection to FATCA is that it is US-centric and not really suitable for multi-lateral rather than bi-lateral information exchange. All of which is true and the reason why the G-8 has asked the OECD to work on its own model for multi-lateral automatic information exchange.

As all the experts in Brussels (including STEP) therefore pointed out, the result is that potentially over the next 2 years the industry will have to work on implementing 3 different tax information exchange systems at once – FATCA, DAC and whatever the OECD comes up with – each basically designed to do the same thing but each doing it slightly differently. This is clearly absurd, but it will be interesting to see who blinks first.

George Hodgson, STEP Deputy Chief Executive

I heard it through the grapevine…

Keeping abreast of the ever-changing tax rules is a challenging pastime for all professionals. My time spent on Committees for STEP has been invaluable, as I get to mix with professionals who cover all walks of the trust and estate practitioner fields and learn first hand about the latest issues that will, or might, affect our industry.

We are only human after all and, as technology continues to progress, we become overloaded with electronic updates and global news from a never-ending number of sources. Taking the time to read all subscribed email notifications thoroughly becomes increasingly difficult. Inboxes clogging up can become visually depressing, and it is for this reason that I am in debt to STEP for the News Digests with their bite-size updates.

But the other emails do contain some interesting nuggets – for example, without my connections with independent financial advisors, I would not have been aware of the recent changes to the treatment of tax for trail commissions, as described in the HM Revenue & Customs Brief 04/13

In a nutshell, where an investment manager receives trail commission and this is paid as a rebate to the investor, HMRC has now confirmed that they consider these payments to be taxable income. Historically, I have considered this as a return of one’s own money and if anything should be shown as a reduction of investment management fees within the trust accounts, but this may just have been my idea of common sense…?

In practice, rebates are becoming a thing of the past; but still, briefs like this can fly under the radar. I am thankful for my connections and now pass on this little bit of gained knowledge.

Cheryl Farnham TEP, Chair of the STEP UK Practice Committee

G-8 Wash-up

For STEP members I suspect the G-8 meeting has confirmed a couple of things, but left others open to question. The final communique confirms that we are moving from tax information exchange on request to automatic tax information exchange as the international standard. Moreover the OECD paper released for the G8 summit suggests strongly that Model 1 style FATCA Intergovernmental Agreements (IGA) are likely to be the basis of the new global automatic information exchange mechanisms. None of that should come as a major surprise to anyone.

It also looks like the debate about improving transparency of beneficial ownership has been a difficult one for G-8, in spite of this being the area where the UK worked hardest to build expectations ahead of the summit.

At the end of the day the G-8 members have agreed to implement the latest FATF Recommendations, but they would have to in any case.

The US has also agreed to look at the issues that prevent effective access to beneficial ownership information in some US states, but without any clear timetable or indication of how it proposes to tackle the issue.

The UK is pressing ahead with a corporate register of beneficial ownership, but seems unlikely to make this a public register. On most reports it has also secured an agreement with the CDs and Overseas Territories regarding Mutual Assistance.

The direction of travel on all these issues is nevertheless clear. Later this week, for example, I am attending an EU meeting with the Commission on moving to automatic information exchange. As a senior figure at this week’s STEP Guernsey conference put it, the important issue for both the industry and jurisdictions in this environment is to ensure they are seen as part of the solution, not part of the problem.

George Hodgson, STEP Deputy Chief Executive