Law on trusts must be brought up to date

Getting the balance between state interference and personal freedom in dealing with succession is difficult. Picture: Esme Allen

Returning from the STEP Global Congress in the US last month, where I had been the only Scots lawyer attending, I mulled over the thought that there is a lack of appreciation in Scotland about the current relevance and importance of the law of trusts.

In March 2009, the Scottish Law Commission issued its report on how the law of succession in Scotland could be modernised. The Scottish Government acknowledged receipt in July 2009 but until the Land Reform Review Group (LRRG) report earlier this year, nothing much was heard about succession. The LRRG report was scathing about the lack of progress and there has been a small flurry of activity with a consultation on abolishing Bonds of Caution and other relatively minor matters but nothing else.

Getting the balance between state interference and personal freedom in dealing with succession is difficult. One thing that we do need in the law relating to trusts and succession is certainty. The problem when personal freedom and political agendas come into conflict is that certainty is seldom created. Perhaps if the political agendas can be removed there might be more progress.

As I see matters, there are several problems in getting political engagement with trust law: a general attitude that trusts are seldom used; Her Majesty’s Revenue and Customs (HMRC) antipathy; and a general perception that they are complicated, abused for tax purposes, used to put assets beyond the reach of government and only used by the rich. Some of these concerns may be justified in connection with offshore trusts but not, in my experience, for onshore trusts and virtually every Will that is prepared contains some type of trust, even if it is potentially a bare trust to hold assets until a beneficiary reaches the age of 16. Trusts permeate society, from charities, to business, to financial institutions, to pensions and most are in some way or another involved in some form of protection of the vulnerable whether caused by death or other hardship.

The association of trusts with money laundering and tax evasion, which is illegal, as opposed to avoidance which I think is still legal, is another major misconception. Trusts have undoubtedly been tainted by being used in some tax avoidance schemes.

HMRC, political antipathy and a concern that trusts were being used to avoid paying tax was the major reason for the change in the taxation of trusts in March 2006 and several changes since. Now we have a trust that is a liferent trust as far as trust law and income tax is concerned but a discretionary trust as far as inheritance tax is concerned.

Governments have a voracious appetite for information and an innate distrust of anything that could be used to hide information from them. Trusts do not have to be registered anywhere, but I think it is general practice that in Scotland we register our trust deeds in the Books of Council and Session, for preservation, which is a public register. Therefore, most Trust Deeds in Scotland can be viewed and the potential beneficiaries ascertained, if one is “interested” enough.

Then we get to the American imposition, Foreign Account Tax Compliance Act (FATCA). Why did the definition of a “financial institution” have to be extended to include trusts by the UK? If nothing else, virtually all trusts receiving investment advice now have to be reported to HMRC in one way or another, so if they were not aware of them before they are now. In my experience virtually all onshore trusts are tax compliant, they are registered with HMRC and pay tax. If trust and estate practitioners come across one that is not then we should not act for the Trustees.

FATCA is not reciprocated by the US and the rest of the world is playing catch-up. The OECD proposed, and the recent G20 meeting in Australia accepted, that there should be a “common reporting standard” (CRS)under which 128 governments will agree to exchange tax information in a uniform way. The early adopters will commence implementation on 1 January 2016. An irony is that the Americans, having implemented a one-way street on information receipt, will not be signing up to CRS.

Trusts play a major part in the legal armoury that we use to protect and provide for the vulnerable and disadvantaged in our society whether that be via wills, trusts or charities and it is vitally important that our law is brought up to date sooner rather than later.

• John McArthur is a partner in Gillespie Macandrew LLP

www.gillespiemacandrew.co.uk