Date of issue: 8th March 2004

New Trust Tax Plans Labelled Unfair by Clement Keys

A firm of Birmingham accountants has serious misgivings over the Inland Revenue's proposed modernisation of the tax system for trusts.

Chartered accountants Clement Keys, Birmingham is particularly concerned about the impact the new rules would have on tenants who have paid money into a trust for the financing of long term repairs and maintenance projects.

Trusts containing these property service charges have usually been established in order to comply with statutory requirements laid down by the Landlord and Tenant Act (1987). Such funds are already taxed at 34% and the rate is due to increase to 40% in April.

The Inland Revenue is currently consulting over revisions to the tax treatment of trusts, which will be introduced from April 2005.

Although this approach appears to be a reasonable compromise between different kinds of taxpayers, Clement Keys believes many more standard rate taxpayers and non-taxpayers could be penalised. Under such a system they would also be required to file self-assessment tax returns.

A fairer solution would be to differentiate between trusts, exempting funds created by statute such as those dedicated to property maintenance. Since this would make the taxation system more complex and provide potential for tax avoidance due to loopholes, the firm acknowledges it is unlikely the Inland Revenue will consider this approach. To ease the burden it therefore suggests the revised system could incorporate a series of tax bands.

"The Inland Revenue should look into how tax is calculated and collected," says
Clement Keys partner Gavin Whitehouse, who leads the firm's specialist Property Service Charge Unit.

"Many property related trusts hold relatively small amounts of money. Because of this we would advocate a nil tax rate for trusts of up to say £500. A lower rate (20%) for the next £1,000 and a 40% rate thereafter."

To assist landlords and property managers Clement Keys, Birmingham has published a new guide to the services available from its Property Service Charge Unit. The guide highlights the issues relating to commercial and residential property service charges such as the lease, different types of expenditure and what is recoverable, plus the VAT and other property
tax implications.

In view of the Government's plans to reform the tax treatment of trusts, Clement Keys is calling for the forthcoming increase in the tax rate applicable to trusts should be withdrawn pending the outcome of the review.

"If they go ahead the Inland Revenue's reforms will have far reaching implications for many people who pay money into different types of trust funds," says Phil Cook, partner and head of the specialist taxation division.

"We are making our views heard because we feel strongly that the proposed changes are not a fair compromise between different kinds of taxpayers and that they will create higher bills and extra work for people when it is likely that the Inland Revenue will gain very little in extra returns."