Taxation and Trusts: TRS - information to be provided to HMRC about non-taxable trusts and more

Contents:

• TRS - information to be provided to HMRC about non-taxable trusts
• Film partnerships - tax relief restored by the Court
• Family Investment Companies - HMRC closes investigation unit

 

 

TRS - information to be provided to HMRC about non-taxable trusts (AF1, JO2, RO3)

HMRC has just announced that the Trust Registration Service (TRS) will be open for non-taxable trust registrations for all customers from the beginning of September.

In anticipation of the new system going live, trustees of the relevant trusts should be getting all the relevant information about the “beneficial owners” of their trusts together. So, what exactly is the information that will have to be uploaded onto the expanded TRS?

The first thing to remember is that information is about the trust in question and its “beneficial owners”. However, for this purpose the term “beneficial owner” is much wider than what is commonly understood and will include persons who in fact will often be prohibited from benefitting under the trust.

For TRS purposes “beneficial owner” includes the following persons:

• The settlor(s).
• The trustees.
• The beneficiaries (including those named in a letter of wishes).
• Any individual who has control over the trust, such as a protector or another person with a power of veto or power to appoint or remove trustees or beneficiaries.

All trusts registering on the TRS must provide information on the trust and the beneficial owners of the trust, although the amount of information that must be disclosed differs depending on whether the trust is a non-taxable trust or taxable trust. Here we cover non-taxable trusts.

Information about the trust:

• Trust name.
• Date the trust was created.
• Residence of settlor and trustees (only whether UK or not).
• Whether the trust acquired land or property since 6 October 2020 (only yes or no answer required at this point).
• Is the trust registered on any register in an EEA country?
• For non-UK trusts, whether the trust has a business relationship in the UK. 

Information about the trustees:

If there is more than one trustee, the trustees must nominate the lead trustee who will be responsible for the administrative duties in relation to the tax affairs of the trust and be the main contact point with HMRC. More information needs to be disclosed about the lead trustee than about the other trustees.

Information required about all the trustees who are individuals:

• Full name.
• Date of birth.
• Country of residence and country of nationality.

Additional information about the lead trustee:

Contact details (address, email address, phone number).

National Insurance (NI) number, or, if NI number is not available, passport or ID card details to identify the trustee.

If the trustee is a company or other legal entity, the details to be provided are:

• The name of the firm.
• Registered or principal office address.
• Unique taxpayer reference (UTR) for UK firms.
• Country of residence.
• Contact details – for the lead trustee.

Information about the settlor(s):

• Full name and date of birth.
• Date of death if trust created on death.
• Country of nationality and country of residence.
• If the settlor is a business – business name and country of residence.

Information about the beneficiaries:

• Name and date of birth if beneficiaries are named, otherwise details of the class of beneficiaries.
• Country of residence and country of nationality for each named individual.

Information about the trust controllers:

• Name and date of birth if individual.
• Country of residence and country of nationality.
• For corporate bodies, full name and UTR if registered in the UK or address if no UTR available.

For all individuals in any of the above categories there is also a question about mental capacity. This would normally be assumed to exist unless there is proof to the contrary. The reason for this question is that no information about a beneficial owner who lacks capacity may be disclosed by HMRC to third parties.

NOTE: for non-taxable trusts there is no need to disclose any details of the trust assets; the above information in relation to the trust and the beneficial owners is all that is required.

Additional information about the beneficial owners and the trust assets as well as the tax liabilities is required for registration of taxable trusts.

When you consider the detail of the new requirements as outlined above, the amount of the information that is required to be disclosed is not huge and certainly not above what the trustees of any trust should already have in their possession. So, the registration in this scenario may not be quite as onerous as feared.

 

Film partnerships - tax relief restored by the Court

(AF2, JO3)

The England and Wales Court of Appeal (EWCA) has reversed HMRC’s Upper Tax Tribunal (UTT) victory in the long-running Ingenious Media Group partnership litigation.

Overturning the UTT’s July 2019 ruling, the EWCA ruled that the investment partnerships Inside Track Productions and Ingenious Film Partners 2 were carrying on a trade for profit and the investors were thus entitled to claim loss relief against other income, as originally intended by the film investment schemes promoted by Ingenious. A third appellant, Ingenious Games, which invested in computer games, was ruled not to be trading and lost its appeal.

The schemes were marketed between 2002 and 2010 as tax-efficient vehicles through which wealthy individual taxpayers could contribute funds to a limited liability partnership (LLP) for investing in films or video games. Early stage trading losses in the partnerships (which were anticipated to unwind over time as film income flowed into the partnerships with the expectation that the partnerships would become profitable overall) were allocated to the investors to set against their other taxable income (sideways loss relief). As film income flowed into the partnerships, so income tax became payable reversing the benefit of the initial loss relief. The investors borrowed large sums from various banks to invest in the partnerships.

However, HMRC subsequently disallowed the investors’ claims for sideways loss relief.

The various LLPs have fought HMRC's enforcement stance for several years, starting in the First-tier Tax Tribunal (FTT) in August 2016. That ruling stated that the partnerships were indeed trading, but otherwise went in HMRC's favour, awarding the investors only limited relief on their losses.

However, HMRC claimed that these schemes were being used to avoid tax rather than fund films. The two sides failed to agree on the interpretation of the FTT’s original ruling and sought clarification from the Judge. This led to a new ruling in which the FTT decided that the vast majority of the partnerships’ expenditure was not an allowable deduction for tax purposes. 

The LLPs then went to the UTT, where, in July 2019, they suffered a defeat. That tribunal, in a long and complex Judgment, agreed with HMRC that the activities carried on by the LLPs did not constitute a trade genuinely carried on with a view to profit and that none of the investors' expenditure on film rights could be written off against taxable profits.

The matter then went to the EWCA, which has now restored the FTT’s August 2016 ruling – that the film production partnerships were trading with a view to profit, i.e. they were bona fide commercial businesses and not tax avoidance schemes. It recognises the realities of the film industry, in particular that the aim of a movie is to make a profit, but that it is not possible to predict which will succeed. It was clear that the LLPs 'had the hope and intention of carrying out, and carried out, actions…which would give rise to a realistic possibility of making a profit,' said the EWCA. Moreover, there was documentary evidence that the 'controlling minds' of the LLPs clearly envisaged the possibility of their breaking into profit at some point, the Court found.

The EWCA Judges said that they were unable to agree with the UTT’s view that the suggestion that the LLPs intended to make a profit was at odds with all the evidence. 'We consider that the UT was wrong to interfere with the FTT's decision as regards…both the issue of trade and the issue of a view to profit.'

Accordingly, the EWCA allowed the appeals of Inside Track Productions and Ingenious Film Partners 2 (Ingenious Games LLP & others v HMRC, 2021 EWCA Civ 1180).

 

Family Investment Companies - HMRC closes investigation unit (AF1, AF2, RO3, JO3)

HMRC has closed its specialist Family Investment Company (FIC) unit after finding no evidence of a correlation between the use of FICs and non-compliant behaviour.

A FIC is a company, typically set up in the UK, which holds investments that would otherwise be held by family members personally. By setting up a FIC, a wealthy donor can transfer substantial wealth to the next generation without suffering an immediate IHT charge. They can also achieve this with flexibility.

Family trusts were the traditional vehicles used to achieve this objective. However, FICs have become popular since the extension of the inheritance tax (IHT) relevant property regime to effectively all trusts that offer a degree of beneficiary flexibility, in 2006. FICs do not attract the initial 20% IHT charge that would apply.

The possible downside with FICs is that, because of the extra compliance involved, costs and charges are much higher and it is generally thought that they would be unsuitable in cases where the cash being transferred is less than £2 million. Also, share rights need to be carefully drafted.

In a sample of FICs reviewed by HMRC, the average assets amounted to around £5m, leading HMRC to conclude that FICS are mainly used by wealthy people. (For this purpose, HMRC defines wealthy people as having an annual income exceeding £200,000, or those with wealth of more than £2 million.) Further analysis showed that FICs are not a vehicle often used by the extremely wealthy, who tend to use family offices to manage their wealth.

HMRC’s dedicated unit, which was introduced in 2019, was tasked with conducting risk reviews of private companies used by family offices and high net worth individuals to manage their wealth and making sure that they are operating in line with UK tax laws.

The existent of the unit was not publicised at the time, but came to light in early 2020 after a Freedom of Information (FOI) request from Pinsent Masons.

HMRC has now said: “In the research we undertook there was no evidence to suggest that there was a correlation between those who establish a FIC structure and non-compliant behaviours. As with any analysis of a taxpaying population, the same broad range of tax-compliance behaviours were observed, with no evidence to suggest those using FICs were more inclined towards avoidance.”

FICs will now be treated as ‘business as usual’ by HMRC, rather than be subject to the scrutiny of a dedicated unit.

Whilst this will be good news for users of FICs, they will nevertheless still be subject to normal scrutiny by HMRC even though no longer by a dedicated unit. Also, the Government does not rule out bringing into play anti-avoidance rules for FICs in the future.

 

 

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