A new system for collecting tax from settlor interested trusts is complex and expensive, and imposes a ‘cumbersome bureaucracy’ on everyone involved, the Law Society has warned.

A settlor interested trust is one where a person – the settlor - has placed assets, such as money or property, in a trust from which he or she, or his or her spouse, civil partner or children under the age of 18, may benefit.

The settlor is liable for income tax on revenue from the trust, but under the old system both then settlor and the trustees paid the tax bill, with the trustees then receiving a refund in the form of a credit.

HM Revenue & Customs (HMRC) has now replaced this long-winded procedure with a three-stage process that requires the tax to be paid only once, by the settlor.

Law Society President Linda Lee has written to HM Treasury to warn that the new process is ‘unclear in its application and increases the administrative burden on the settlor, the trustees and HMRC itself’.

She added that it would be simpler to return to the previous system, which would be ‘greatly preferable to the cumbersome bureaucracy proposed by HMRC’.

Gill Steel, member of the Law Society’s wills & equity committee, said: ‘The problem is simple, it’s the execution that is muddled.’

She added that the introduction of a 50% tax rate was likely to cause still further complications.

‘There will be an increase in repayment claims, generating extra work for settlors, trustees and HMRC alike,’ Steel said.