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Dealing with the trust admin - is it worth it?

Technical Article

Publication date:

05 November 2019

Last updated:

06 November 2019

Author(s):

Barbara Gardener

Record keeping, accounting and dealing with HMRC.

Last month we commented on the reduction in the total number of trusts and estates registered for self-assessment with the numbers falling by almost 30% since 2005.

We also noted that the introduction of the Trust Registration Service (TRS) probably contributed to this trend. Of course, trust registration is only one of the admin duties of the trustees and so it may be timely to remind ourselves of these sometimes substantial burdens placed upon the trustees, of course in addition to the fiduciary duties of looking after the trust property for the benefit of the beneficiaries. 

Many financial advisers will only have dealt with trusts of life assurance, perhaps including investment bonds. Here the trust “form” would be provided by the life office and, as long as the only asset of the trust is the life plan, the trustees’ admin duties will be minimal (this of course will change from next February as explained below). But what happens when the settlor of a life policy trust dies and the trustees receive the sum assured? Those who advise trustees of existing trusts, often created in a will of a deceased client (or as a result of intestacy), will face such practical issues at the outset, especially when the trust is a life interest trust and so the funds need to be invested in income-producing assets. In such a case the admin will start biting immediately. 

So let’s consider the key admin duties of trustees. 

Generally, trust administration will include record keeping, accounting and dealing with HMRC.

 

Record keeping and accounts 

This involves recording of:

  • All money coming into the trust, e.g. additions to settlement, income, gains
  • All money coming out of the trust, e.g. tax, appointments of income to beneficiaries, advancements of capital, loans, trustees’ expenses.
  • Minutes of trustees’ meetings, resolutions etc
  • Correspondence with beneficiaries etc
  • Investment policy, review of investments
  • Appointments of agents/delegates
  • Preparation of trust accounts 

The list is not exhaustive – obviously it will depend on the circumstances of each trust.

Of the above list, two are particularly important.

 

Preparation of trust accounts. 

Trustees are under a legal obligation to produce an account of the funds under their control. Of course, having proper accounts is also a matter of sound practice and necessary to ensure that all the trust assets are properly accounted for and that correct tax returns can be made in respect of the trust assets. Accounts should be prepared on each anniversary of the trust creation and it would make sense to coincide the preparation of the accounts with receipts of the annual statements relating to the trust investments.

 

Recording of capital and income payments 

One of the most important distinctions for accounting purposes is that between income and capital. It would generally be advisable to keep an income account and a capital account. The reasons for this will be twofold: first, for tax purposes and, second, to ensure the correct allocation of trust benefits amongst the trust beneficiaries: in many trusts there will be a beneficiary entitled to income but not to capital. As is well known, the type of trust, and therefore its taxation, depends on the treatment of the income and capital in the trust. 

Although the above may seem perfectly straightforward, in fact many trustees appear to be confused as to the nature of certain payments, particularly when it comes to distributions of withdrawals from investment bonds. These are not infrequently paid to life tenants as “income” when, of course, bond withdrawals are capital. Some responsibility for this state of affairs must be attributed to some life offices and advisers who often do refer to such payments, often within the 5% annual allowances, as “income”. This is not only factually incorrect but may in fact result in some untoward tax consequences, in some cases with capital payments being taxed as income. 

 

Requirements in relation to “beneficial owners” 

While on the subject of record keeping it is also important to note that the 2017 Money Laundering Regulations (or the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI No. 2017/692) to give it its full name), which came into force on 26 June 2017, introduced not just the trust registration requirements  but also an obligation on trustees of relevant trusts to undertake their own due diligence and record-keeping requirements in relation to "beneficial owners", as well as an obligation, on request, to disclose and update beneficial ownership information to law enforcement authorities and "relevant persons" required to conduct anti money laundering  procedures when trustees enter into transactions or form business relationships with "obliged entities" (such as banks, investment managers, lawyers and accountants).

For these purposes, (and for the purposes of registration) “beneficial owners” include the settlor, trustees, beneficiaries, any class of persons in whose main interest the trust operates (where not all of the individuals benefitting have been determined) and anyone else who has control over the trust. "Control" is widely defined and can include protectors as well as attorneys acting for trustees.

Other "potential beneficiaries" not included in the trust instrument (for example, individuals referred to in a document from the settlor, e.g. in a letter of wishes) must also be disclosed on the Trust Register and on request to law enforcement agencies.

 

Dealing with HMRC 

This includes: 

  • Online trust registration using the TRS (in the old days this was done using Form 41G (Trust) - initial notification of trust existence. 
  • Tax returns (income, gains) - annually - under self-assessment there is a separate “Trust and Estate Tax Return”.   This can be done online using special software (which needs to be purchased) or sending a paper copy of Form SA900. 
  • IHT returns / calculation and payment of exit charges and periodic charges under relevant property trusts (Forms IHT 100 c, d, D34). 
  • Issuing certificates of trust income to beneficiaries (Forms R185 – depending on type of trust). 
  • Tax reclaims - e.g. on behalf of minor beneficiary - Form R40, hold-over claims for capital gains etc.

Obviously, some of the above requirements will only be relevant if the trust assets produce taxable income or capital gains so will not be relevant if the only trust asset is a life assurance plan. Some of the requirements will depend on the type of trust. For example, where the trust is a bare (absolute trust), there will be no need to register it (currently) or indeed make trust returns, as for tax purposes currently a bare trust is basically ignored. 

Of the above list the TRS is clearly the most relevant at the present time, we will therefore consider it in more detail in the next month’s article. 

For the time being it is important to remind that the EU's Fifth Money Laundering Directive (5MLD) which came into force on 9 July 2018, with an implementation deadline of 10 January 2020, expands the scope of the Trust Register.

Namely, it requires all express trusts to register, whether or not they are taxable trusts. (At the moment only trusts which incur a tax liability in  a tax year need to register). In theory this would catch all UK resident express trusts including some ordinary, everyday arrangements which many people may not realise involve a trust (jointly owned property, bank accounts for minors, pension death benefits and life insurance policies, for example). The government is aware of the scale of the issue and has apparently been looking at ways to limit the impact of this change, but so far they have not provided any detailed guidance despite the time to implementation getting shorter. Hopefully the full details will be available before the next month’s article.

 

Comment 

Although some of the admin requirements, especially those coming into effect next year, may appear daunting, in practice, and given that much of the process is now in digital form, the additional registration requirements should not be too much of a problem for those trustees who already keep proper records. Of course, the biggest problem will be for those trusts which at present do not have to register because they do not have any tax liabilities, but we are still hoping that the Government will come up with some simplification here as had been promised but not yet delivered (another Brexit victim no doubt). Last month we considered the tax and practical benefits of trusts. Will some of these be outweighed by the increasing admin duties? Only time will tell.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.

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