Taxation and trusts; HMRC Trusts and Estates Newsletter and more.

Contents:

• HMRC Trusts and Estates Newsletter
• TRS and life insurance policies - latest news
• Minimum rate of corporation tax and taxing multinational profits
• Government launches consultation on exit payments to farmers 

 

 

HMRC Trusts and Estates Newsletter

(AF1, JO2, RO3)

The May 2021 edition of the HMRC Trusts and Estates Newsletter is now available

The latest HMRC Trusts and Estates Newsletter is now available, and, as always, it includes some useful updates.

Response to the first Office of Tax Simplification’s review of inheritance tax

On 23 March 2021 the Government responded to the Office of Tax Simplification (OTS)’s Inheritance Tax (IHT) Review – first report: Overview of the tax and dealing with administration.

A copy of the Government response is now available and it has announced that it will:

• change reporting regulations so that from 1 January 2022 over 90% of non-taxpaying estates each year will no longer have to complete IHT forms for deaths when probate or confirmation is required; and
• make permanent the ability for those dealing with a trust or estate to provide an IHT return without requiring physical signatures from all others involved, so it will be possible for individuals to continue to deal with IHT returns in the same way as they have during the pandemic, thereby easing the administration burden.

Summary of responses to The Taxation of Trusts: A review

On 23 March 2021, the Government published a response to the consultation The Taxation of Trusts: A Review, which closed on 28 February 2019. The consultation set out the principles for taxing trusts and sought views and evidence on reform in line with those principles. Even though the Government received numerous written responses they did not indicate a desire for reform of trusts at this stage.

Find out more information about the summary of responses.

Trust Registration Service update

HMRC has now published an update including a Technical Manual and the data needed for those trusts which are required to register in preparation for opening the Trust Registration Service.

Trusts and Estates with small amounts of savings income

In 2016, HMRC introduced an interim arrangement so that trustees or personal representatives do not have to submit returns, or make payments under informal arrangements, where the only source of income is savings interest and the tax liability is below £100.

The arrangement was subsequently extended and has now been further extended to include the 2021/22 and 2022/23 tax years. HMRC will continue to review the situation longer term.

                                

 

TRS and life insurance policies - latest news

(AF1, JO2, RO3)

HMRC recently published its Trust Registration Service (TRS) Manual, which mostly confirmed the previous interpretation of the TRS rules. However, there was some confusion in relation to life insurance policies. Some of the initial guidance referred to life policies which had no surrender value, whereas this was not specifically provided for in the legislation. Whilst it was clear that the intention was that only “pure protection policies” would be excluded from the TRS obligation to register, there was a question over a number of whole of life protection policies which could acquire, albeit relatively small, surrender values.

Under the statutory provisions (Sch3A(4) and Sch3A(8) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ) as amended, the following is an “excluded trust”:

“4.  A trust of a life policy or retirement policy paying out only -

(a)on the death, terminal or critical illness or permanent disablement of the person assured; or

(b)to meet the cost of healthcare services provided to the person assured”.

HMRC has now confirmed that Sch3A(4) “can be properly interpreted as including trusts holding policies that have surrender values, and that those trusts would remain excluded until such time as the policy is actually surrendered. It follows from this that pay-outs received from such policies on death would continue to benefit from the exclusion at Sch3A(8)” (i.e. two years’ freedom from registration). HMRC is to include this position in the next iteration of the TRS manual.

HMRC continues to work on some of the fine detail and further guidance will be issued in due course, including in relation to policies which may have hybrid features.  

The question of policies with a surrender value, such as unit linked investment plans, is, of course, very important to financial advisers. Whilst it might be difficult to argue that an investment linked plan falls within this definition of a policy that pays out ONLY on death or serious illness etc., clearly, we have not heard the last of this.

                                 

 
Minimum rate of corporation tax and taxing multinational profits (AF2, JO3)
Before the arrival of Joe Biden in the White House, discussions around a global approach to corporate taxation (and especially the taxation of multinational tech companies) had largely taken place at OECD level. An increasing number of countries, including the UK, France, Spain and Italy have introduced their own digital services tax (DST). The G7 countries (UK, USA, Canada, France, Italy, Japan and Germany) have now agreed in principle to:

• Ensure that the “largest and most profitable global companies” pay tax in the countries in which transactions take place, i.e. where they make their sales;
• Implement a global minimum corporation tax rate of 15%, operated on a country-by-country basis.

Please see the Treasury press release.

Both of these proposed changes (referred to respectively as Pillar One and Pillar Two of the overall initiative on Global Taxation) are significant and there is a strong hope that the G7 agreement will pave the way for a wider agreement with the G20 nations at their summit planned to take place in Venice in July followed by agreement within the OECD.

The proposed changes raise a number of questions:

On the minimum rate of corporation tax:

1. What is the main reason for the minimum rate proposed?
2. To reduce the attraction of low/no tax jurisdictions as homes for multinational businesses.
3. Why is the proposed minimum rate so low at 15%?
4. Initially the rate proposed by the USA was 21%, but by the time of the G7 meeting it had dropped to 15%. It has been reported that this rate was a compromise to secure an initial agreement. The rate referred to in the statementissued by G7 finance ministers is “at least 15%” - leaving scope for future upward movement. It is worth remembering 15% is still higher than Ireland’s current 12.5% corporation tax rate.
5. Will this rate be agreed and implemented – by a wider group of countries like the G20 and OECD?
6. Wide agreement will be essential for this to have the desired impact.

There will be a number of countries (e.g. Ireland, Luxembourg) whose “fiscal competitiveness” will diminish if this rate is widely accepted. The corporate rate in G7 countries is already above the proposed minimum of 15% - currently 19% in the UK (and due to rise to 25% in 2023). One would also expect additional measures – soft and hard – to be introduced by minimum rate signatory nations to discourage businesses’ continued use of low tax environments.

1. Would this have an impact on the taxation of offshore life assurance companies underwriting offshore bonds?
2. It might. It would be necessary to see whatever detail emerges to ascertain whether the proposed minimum rate would apply to gains and income on policyholder funds. For UK bonds, the proposed 25% corporation tax rate taking effect from 1 April 2023 will not apply to tax levied on policyholder funds as the policyholders’ funds’ rate is linked to the basic rate of tax rather than mainstream corporation tax.

On taxing global multinationals:

1. Why is this proposal being made?
2. To ensure that the largest global multinational companies (e.g. Apple, Amazon, Google) pay more tax in the countries in which the buyers of their goods and services reside. At present, companies can set up local branches in countries that have relatively low corporate tax rates and declare profits there. That means they only pay the local rate of tax, even if the profits mainly come from sales made elsewhere. This ‘relocation’ of profits is legal under current international tax law, which was designed for a pre-digital era, and is widespread among multinationals – not just tech companies.
3. Which companies would be affected?
4. It seems that only the largest global companies with profit margins of at least 10% would be caught. One can immediately see some important definitional challenges that would need to be met to ensure that there was sufficient clarity over the scope of the provision. Some in-built anti-avoidance provisions would also seem to be essential.
5. How would the tax work?
6. It is proposed that affected companies would need to allocate ‘at least 20% above a 10% margin’ of their global profits to countries where they make their sales. This gives rise to more important definitional challenges. The G7 in their statement said “We commit to reaching an equitable solution on the allocation of taxing rights, with market countries awarded taxing rights on at least 20% of profit exceeding a 10% margin for the largest and most profitable multinational enterprises.”
7. Would the new tax be in addition to the current UK DST?
8. A point of contention it seems. Those countries with an existing DST (e.g. UK and France) appear to be willing to consider abolishing their own DSTs once the new provisions are enacted and in force. Removal of existing DSTs is currently a demand of the USA as part of the overall reform.

By way of a reminder, with effect from April 1, 2020, the UK has had a DST, joining France and Italy which already had in place broadly similar taxes. The UK DST is charged at 2% on revenues of large businesses that are derived from UK users of social media services, search engines and online marketplaces.

1. Should financial planners be concerned?
2. The vast majority of corporate clients of financial planners will probably not be affected by these proposed tax reforms – in the same way as they are unaffected by the existing (and relatively new) DST.

That said, after years of slow progress in OECD talks on international corporate tax, the sudden movement towards a solution is indicative of a change of heart among global finance ministries. The damage to national finances caused by the pandemic has prompted a search for the least painful ways of raising more revenue. As Rishi Sunak has shown, turning the screw on company profits is such a route. In electoral terms it is one that becomes all the more appealing when the companies concerned are foreign.

                                 

Government launches consultation on exit payments to farmers (AF1, AF2, JO3, RO3)

A Consultation has been launched on changes to the Basic Payment Scheme (BPS) to support farmers through the agricultural transition period from now until 2027, during which time the financial support system for the farming industry is being reformed.

This Government consultation will be open for 12 weeks and focuses on two key areas:

• Lump sum exit scheme – Building on evidence that some farmers would like to retire or leave the industry but have found it difficult to do so for financial reasons, the Government proposes to offer them a lump sum payment to help them do this in a planned and managed way. The exit scheme will offer farmers who want to exit the industry all of the area payments they would likely have received until the end of the transition period in a single lump sum. The consultation seeks views on who should be eligible for these lump sum payments and how the payments should be calculated.

• Delinked payments - the Government believes that Direct Payments currently made through the BPS offer poor value for money and, as they are based on how much land a farmer has, inflate rent and can stand in the way of new entrants. The Government plans to phase Direct Payments out over a gradual seven-year transition period. The consultation includes plans to separate the payment from the amount of land farmed, from 2024. The consultation seeks views on how the ‘delinked’ payments will be calculated.

It remains to be seen how any lump sums or delinked payments will be treated for tax purposes. The consultation says:

“We are aware that the tax treatment of lump sums, as well as delinked payments, is an important issue for many farmers. We are discussing this with HMRC and guidance about the tax treatment will be provided in due course.”

The consultation will close for responses on 11 August 2021. A full report on the responses to the consultation will be published later in the year.

The Government says that it is also working together with industry leaders, local councils, landowners and new entrants to co-design a scheme to create opportunities for new farming businesses. The new scheme will be available to support new entrants from 2022. Recommendations for the design of the scheme will be shared later this year.

And, in April, farmers looking to continue farming were encouraged to express their interest in participating in the national pilot of the Sustainable Farming Incentive. The application window for this has closed, with successful applicants expected to be invited to make a formal application to begin agreements starting in October shortly.

It will be interesting to see what the tax treatment will be of these lump sums and delinked payments. Also, as many farmers will likely use the coming changes to consider the future direction of their business, this might present a good opportunity to review business reliefs available on any potential sale or succession plans, such as business asset disposal relief (BADR) for capital gains tax, and inheritance tax business relief and agricultural property relief with farming clients.

 

 

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