Dealing with trust admin - is it worth it? - Part II

Last month we considered the key duties of trustees in relation to record keeping, accounting and dealing with HMRC. We briefly mentioned the online Trust Registration Service (TRS) which came into effect in 2018 and is being expanded from next year in order to comply with the EU's Fifth Money Laundering Directive (5MLD) which came into force on 9 July 2018, with an implementation deadline of 10 January 2020. 

We have indicated that the new rules will require all express trusts to register, whether or not they are taxable trusts which, in theory, would catch all UK resident express trusts including some fairly ordinary, everyday arrangements which many people may not realise involve a trust (for example, jointly owned property, bank accounts for minors, pension death benefits and life assurance policies). 

We mentioned that the Government was aware of the scale of the issue and had allegedly 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. It was hoped that the new guidelines would appear soon. Unfortunately, what with Brexit and the General Election, unsurprisingly this is not a Government priority. 

Given the short time scales it is, however, important to be aware of what is coming and so this month we will explain the TRS process as it currently operates and what to expect in the worst-case scenario, i.e. if there is no let out for some of the more straightforward trust arrangements.

 

Trust Registration Service 

The TRS is an online service that provides a single route for trustees and personal representatives of complex estates to comply with their registration obligations under the  2017 Money Laundering Regulations. 

The TRS replaced the paper 41G (Trust) form and the ad hoc process for trustees to notify HMRC of changes in their circumstances. Trusts that are required to register with HMRC are required to do so through the TRS. 

At present only certain trusts need to register on the TRS, namely:

• All UK express trusts where the trustees have incurred a tax liability in a given tax year; and 

• All non-UK express trusts which receive UK source income or have UK assets on which the trustees have incurred a UK tax liability in a given tax year.

The term ‘express trust’ covers all trusts that have been deliberately created by a settlor (i.e. as opposed to statutory, resulting or constructive trusts); whilst a UK tax liability for these purposes includes a liability to income tax, capital gains tax, inheritance tax and/or stamp duty land tax. 

Note that if the trustees have not incurred a tax liability, either because they have claimed a relief or because the liability falls on the settlor or on a beneficiary, registration on the TRS is not required. This would include the situation where all income is mandated directly to an interest in possession beneficiary and, of course, any bare trust. Trusts that have no UK tax liability other than a tax liability of less than £100 on bank or building society interest income are also exempted from the requirement to register. 

It is the trustees’ responsibility to register if this is required although they can appoint an agent for this purpose. 

Note that you cannot simply sign straight on to the TRS. First, you must open an online Government gateway account. 

New UK resident trusts with tax liabilities must register by 31 January after the end of the tax year in which the trust was created, or by 31 January after the end of the tax year in which first tax liability arises, if later. 

For offshore trusts, it should be remembered that the requirement to register via the TRS is separate from the existing requirements for any professional adviser (other than a barrister) who has been involved in setting up a non-UK resident trust, where the settlor is UK domiciled or deemed domiciled, to notify HMRC under section 218 IHT Act 1984 (unless the trust has been created by a will or  an IHT form 100 has been delivered to HMRC).

 

Information required 

The TRS will ask for the following (all of which should be readily available to trustees who have kept proper records): 

• The name of the trust; 

• The trust address and telephone number; 

• The date the trust was established; 

• The country where the trust is resident; 

• Details of the trust assets, including addresses of properties, and an estimated market valuation of assets held at the date the assets were settled; and 

• Identity details – i.e. name, address, date of birth and National Insurance number (or passport/ID number if no NI number) – of the settlor, trustees, the beneficiaries (or class of beneficiaries where individual beneficiaries have yet to be determined or identified) and any person exercising effective control over the trust, such as a protector or appointor or even an attorney acting for the trustees. Other "potential beneficiaries" not included in the trust instrument (such as individuals referred to in a document from the settlor, e.g. in a letter of wishes) must also be disclosed.

 

What is changing? 

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 this Register. 

Namely, as mentioned above, it requires all UK resident express trusts to register, whether or not they are taxable trusts. 

Trusts resident outside the EU will need to register not only if they are taxable here (under existing rules), but also if they form a business relationship (expected to last for 12 months+) or acquire real estate in the UK on or after 10 March 2020.

There are also new provisions in relation to data sharing. While the Trust Register will not be opened generally to the public, 5MLD requires the Government to consider any request for information about a trust or its beneficial owners from anyone who claims to have a "legitimate interest" in the information. Legitimate interest is not defined in 5MLD and so the Government has scope to determine its ambit. It is proposing to limit disclosure to those with an active involvement in anti-money laundering (AML) or counter-terrorist financing who have evidence of money laundering or terrorist financing. 

The final change concerns the so called “obliged entities”, i.e. businesses that are required to conduct customer due diligence. These already include estate agents, lawyers, accountants, banks and other financial institutions but the scope is being expanded to include letting agents, tax advisers and art intermediaries (e.g. galleries, dealers, auction houses). 

This means that trustees will need to disclose beneficial ownership information and changes to an even greater number of entities with whom they do business.

 

New deadlines for registration on TRS 

For those unregistered trusts already in existence on 10 March 2020, the Government proposes a deadline of 31 March 2021. This will hopefully provide sufficient time given the greater number of trusts that will need to be registered. 

For trusts created on or after 1 April 2020, the Government proposes that the trust should be registered within 30 days of its creation. 

Currently, trusts that are more than six months past their registration deadline can face a penalty of the greater of up to £300 or 5% of the tax liability. 

Since the new rules cover trusts without a tax liability, HMRC has said it will consult on a suitable replacement penalty framework in a further technical consultation due later this year.

HMRC has not yet confirmed the situation for trusts created between 11 March and 31 March 2020, so we expect this to be clarified in the later consultation. 

 

Comment 

Those trustees who have already had to register using the TRS will not, under the current proposals, find themselves under any additional burden.  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, here again, provided they have kept proper records (as they should have done) the burden should not be excessive. Remember that existing trusts which have not had to register yet as they do not have any tax liabilities will have until March 2021 to get organised. And whilst the 30 days deadline to register any new trusts from next April may appear short, in fact it makes good sense given that, when a trust is first created, all the relevant information will be readily available and so the registration will be something that can be done relatively easily and quickly. 

And, of course, things may well still change depending on the outcome of the General Election on 12 December. The Tory manifesto has nothing on this particular subject (and nothing on inheritance tax at all, despite earlier promises from Sajid Javid to abolish inheritance tax) but we would hope that if there is a next Tory government it will come up with some simplification for straightforward life policy trusts and absolute gifts, as had been promised. 

On the other hand, the Labour manifesto does include a specific section on trusts which, they claim, “are a key vehicle for tax avoidance and illicit financial flows”. Labour proposes to create a public register of trusts to include all trusts that operate through the UK, going beyond the existing TRS, and access to which will not be limited to those with a ‘legitimate interest’, which, as explained above, is the position under the current TRS. Trust practitioners have therefore yet another reason to keep an eye on the outcome of the General Election.