To Grandfather, or not to Grandfather, that is the question.

The UK’s tax system is undeniably complex. One can debate the reason for this, but ultimately the system is about more than collecting revenue. It is a method by which the administration can achieve social and political goals. But is it also complex in an attempt to ensure some level of fairness.

Exemptions, reliefs, deductions and even double tax treaties on the one hand; anti-avoidance and forestalling measures on the other. The generally accepted practice of not applying retroactive tax measures, otherwise known as ‘Grandfathering’, perhaps falls between these two stools. It certainly (in most taxpayers minds) falls into the category of ensuring fairness.

So the question is: when Chancellor Rachel Reeves stands up on the 30th October and announces (as we think she will) the removal of Inheritance Tax (IHT) protection from trusts established by non domiciles, known as Exclude Property Trusts, how fair will she be??

?The Case for Grandfathering

In reality I shouldn’t need to make a case. However - bear with me - this article will highlight some real practical and financial issues that many clients will face and need advice on.

Under the current rules, a trust established while an individual who is a non UK domicile has favourable status, which continues even after the settlor has become deemed domicile. This protected tax status was considered at the time as striking the right balance between the taxation of long term residents of the UK, and the need to attract investment and individuals who would make a contribution to the economy.

Even if the Treasury now take a different view, it is surely unfair for these taxpayers who continue to make a contribution to the economy, to now find themselves in a punitive tax regime.

Furthermore, in the absence of Grandfathering:?

• such individuals may actually find themselves at a significant tax disadvantage compared to UK domiciles: they may be exposed to double taxation plus potentially excessive tax charges upon withdrawing funds, given the trust may no longer be fit for purpose.?
• the assets in the trust will no longer be ‘excluded property’, and so will be subject to the ten yearly anniversary charge.?
• the gift with reservation of benefit rules will also apply so the entire value of the trust will be within the settlors estate and subject to tax on his or her death
• should the settlor choose to exclude themselves from benefit there will still be a tax liability should his or her death arise with 7 years, and
• if the settlor retains an interest and the trust is discretionary they will not only suffer tax on income and gains on an arising basis on distributions but may also suffer additional liabilities due to the matching of historic income and gains.

?I think you would agree: a sound argument for Grandfathering the changes to Protective Trusts.

The case for not Grandfathering?

?In truth, from a technical or fairness perspective, I don’t think you can make a case.

It's a fundamental principle of the rule of law: that a change should only be retroactive in exceptional circumstances. This does not include raising additional tax revenue.

However, as we keep being told, there is ￡22bn hole in the nation’s finances - plus many areas that needs significant investment, not least the NHS. This money isn’t coming from the Treasury's three biggest tax revenue earners [Income tax, National Insurance or VAT (ignoring school fees)].

It begs the question: where is it coming from?

We know the government are expecting an increase in tax revenue from non domiciles. Other than that, all we have been told is that “those with the broadest shoulders will bear the heaviest burden”.

Of course, these two groups are not mutually exclusive. Perhaps a little more enlightening (albeit in the same breath, worrying) were Labour’s manifesto comments. They stated that "...Labour supports most aspects of the proposed replacement to the Non-Dom rules (conservative proposals) but we are concerned that major loopholes remain… Labour will include all foreign assets held in a trust within UK inheritance tax…so that nobody living here can avoid paying UK IHT on their worldwide assets”. ?They went on to clarify that loop holes included Grandfathering of trusts from UK IHT.?

So, while my head tells me they can’t and shouldn’t, my heart say they just might.

If you have clients who are non domiciles with such structures what can you do? Keep your fingers crossed. And if the worse happens ensure they get good advice - they will need it.

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