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Trusts allowing families to pay less inheritance tax could be reformed by HMRC

The Telegraph logo The Telegraph 07/11/2018 Katie Morley
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Financial arrangements used by hundreds of thousands of taxpayers to bequeath their wealth could be reformed so they no longer offer a tax advantage. 

HMRC is concerned that so-called "trusts" are letting some families pay less inheritance tax than those who do not pay accountants to set up the complex arrangements.

Yesterday the taxman launched what tax experts described as the biggest review of trusts in years, in which it calls for views on whether they are "fair" and "fiscally neutral".

Trusts used by taxpayers specifically for inheritance tax purposes are flagged in the document as potentially offering an unfair advantage to people using them.

Inheritance tax trusts allow individuals to move wealth out of their estate, on which inheritance tax is usually paid at 40 per cent on wealth above £325,000 after they have died. 

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Although wealth held in trusts is usually free from inheritance tax it is subject to a range of other tax charges, which may be larger or smaller than the inheritance tax bill would have been had the trust not been established. If HMRC finds these alternative taxes are smaller than inheritance tax it could reform trusts to make them less advantageous, leading to some families paying more inheritance tax.

Over many decades trusts have been set up in various forms by hundreds of thousands of families attempting to pass on their wealth to their loved ones. 

Such arrangements have historically provided tax advantages, however the benefits of trusts have changed as tax regimes have evolved over the years.  

The review was originally announced by Philip Hammond in last year's Budget, suggesting its launch has been delayed by a year.   

© Getty It comes as the Government also announced a crackdown on second homeowners who are falsely claiming their properties are predominantly being used as holiday lets to avoid paying council tax.

As a result it is now considering whether holiday lets should be liable to pay business rates instead, to make sure they pay their fair share of tax.  

It warned the loophole could be depriving councils across England millions of pounds through lost council tax.

Rachael Griffin, tax and financial planning expert at accountancy firm, Quilter, said: The history of trusts dates back centuries with the likes of Charles Dickens and the Jane Austen basing entire novels about the fortunes of wealthy families dictated by terms of trusts.

© Getty That seems a far cry from the world we live in today, however, while the taxation of trusts  has moved on since then relics of the past still exist. So it’s sensible the government consider the taxation of trusts and how they fit in modern day society."

"However, we’re pleased to see that the government are not planning to tear up the rule book and do away with trusts completely. As they acknowledge in their consultation, trusts have their place and what is needed is a clear and transparent regime so that any concern over them being used for unsavory circumstances is removed."  

Watch: Budgeting for your Self Assessment Tax Bill (Money Advice Service)

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