Her Majesty's Revenue and Customs (HMRC) has launched a consultation on how to tackle tax avoidance via unauthorized unit trusts (UUTs).
HMRC wants to stop UUTs being used to unfairly avoid tax, as part of the government's crackdown on tax avoidance promised in the 2011 March Budget.
UUTs are collective investment schemes (CIS) created by deed in which the scheme property is held on trust for investors.
Income from UUTs is regarded as the income of the trustees rather than the unit holders, and so is taxed accordingly at the basic rate from the trustees.
Trustees then make "deemed distributions" to unit holders. This is where trustees pay out the income to unit holders minus the basic income tax.
The trustees inform HMRC of the tax deemed to have been deducted, and then receive relief for the gross deemed payments to the unit holders against the trust income.
HMRC said the current system on taxation, as well as the treatment of income once it reaches unit holders has created loopholes for investors to avoid tax.
Under exempt UUTs (EUUTs), 'investors' are bodies which are exempt from capital gains and corporation tax, such as pension funds, charities and authorized investment trusts. HMRC estimates around 90% of UUTs are EUUTs.
The Revenue asked in its consultation if it should attempt to close these loopholes by reforming the current rules for exempt UUTs, or adopting a principle-based approach for non-exempt UUTs.
UUTs are not regulated or restricted in terms of the investments they make, and can only be marketed by authorised promoters to certain "qualified" investors".
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