The Government's much anticipated new trust registration requirements - The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 (the New Regulations) were laid before Parliament on 15 September. Implementing changes required by the Fifth Money Laundering Directive (5MLD), the New Regulations took effect on 6 October (although the actual deadlines for compliance are somewhat later, as discussed below).
These New Regulations are the culmination of a considerable journey of consultations and discussion points. They amend the regulations brought in to give effect to the Fourth Money Laundering Directive (4MLD) – namely The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the 2017 Regulations).
The changes anticipated due to 5MLD were potentially far reaching and caused significant concern to the Private Client world. In acknowledgement of these concerns, HMRC issued consultations in April 2019 and January 2020 to gather views and experience from the Private Client sector.
5MLD's original envisaged scope – the first consultation
4MLD required all trusts which had a UK tax liability to register their details (and those of their beneficial owners) on the UK's Trust Registration Service ("TRS"). 5MLD expanded this registration requirement to cover potentially all UK trusts (regardless of UK tax liabilities) in addition to non-UK trusts (regardless of UK tax liabilities) which had business relationships with UK advisors and/or which acquire UK real estate.
A major concern was that this could dramatically increase the number of registrable trusts (with some in the industry predicting that the numbers would increase from 200,000 to 2 million). As many trustees were unaware of these newly created obligations, there were fears that many trustees would inadvertently fall foul of the rules.
Of particular concern was the requirement that non-UK trusts forming a business relationship with a UK counterparty in the regulated sector could be obliged to register (and that those UK counterparties would themselves have a duty to check that trust's registration before doing business with them). This new requirement would have caught significant numbers and could have deterred trustees from seeking proper advice from UK professionals.
The second consultation and the New Regulations – a much more workable solution
After spirited voicing of concerns, the final New Regulations address many (although not all) of these concerns.
The New Regulations amend the 2017 Regulations by supplementation and partial substitution, rather than a complete redrafting. Therefore the 2017 Regulations' original scope remains, but additional types of trust are now also caught – and they have their own, specific, registration requirements.
UK resident taxable trusts and non-UK trusts with UK source income and/or directly held UK assets which incur UK tax charges therefore remain within the ambit of the TRS. For these trusts the same registration deadlines remain for this current tax year (2020/21), ie 5 October 2021, if the tax charges arises for the first time in the current year, or 31 January 2022 otherwise. However, the new legislation now requires additional information (such as beneficiaries' and potential beneficiaries' nationalities and countries of residence) to be registered by 10 March 2022 if not already provided in earlier reports.
Going forwards, the timelines for registration are:
- on or before 10 March 2022 – for trusts which become UK taxable after 5 April 2021 but before 9 February 2022
- on or before 10 March 2022 – for trusts which otherwise become registrable (see below) before 9 February 2022 but, seemingly, after 9 March 2020
- thereafter, within 30 days of trustees becoming registrable.
UK trusts are defined as those where either all trustees are UK resident or where at least one trustee is UK resident and the settlor was both UK resident and domiciled (under general law) in the UK when the trust was created or funds were added. So, unless one trustee is resident in the UK, the scope of the definition ought to be clear.
However, having all trustees resident outside the UK may not necessarily means that the trust is outside the scope of the UK trust definition. It should be borne in mind that the decision in Jasmine Trustees Ltd v Wells & Hind (A Firm)  EWHC 38 applied only in relation to capital gains tax. Whilst this case held that only the residence of the actual trustees was relevant for the trust's tax residence, that decision does not necessarily apply in relation to the Trust Register. In any event, non-resident UK trustees still need to take care not to conduct trust business in the UK. Advice should be taken in this regard where it is proposed that powers be reserved under the trust deed in favour of UK resident persons.
New types of trust which are caught
Three new types of non-taxable trust are introduced to the range of the TRS. These include:
- Type A trusts – UK express trusts
- Type B trusts – non-UK trusts with at least one UK resident trustee where the trustees either engage a UK business adviser or acquire an interest in UK land
- Type C trusts – non-UK trusts whose trustees are all non-UK resident and who acquire an interest in UK land.
Types A, B and C also have the proviso that the trust is not an excluded trust (explained below) and (for Types A and B only) nor is it registered elsewhere in the EEA. In relation to the latter proviso, it should be borne in mind that other EEA registers may have higher privacy safeguards and registration on such a register ought then to disapply the UK registration requirement.
Excluded trust concept
The Government has responded to the concerns of the profession by exempting a significant number of express (ie intentional and not merely by operation of law) trusts, which it considers have a low risk of money laundering.
The legislation has therefore specifically excluded from the registration requirements, amongst others, property co-ownership trusts, bereaved minors' trusts and trusts created by will (provided the trust only receives assets from the estate and is wound up within two years).
Bare trusts are not listed under the excluded trusts concept and therefore (unless they fall within a specified exception) remain within the scope of the extended TRS. Taking into account other forthcoming changes (see below), this means that, whichever way UK land is held, the beneficial ownership will be on a register, the TRS may well be preferable to other registers (as explained below).
Despite the exclusions, many UK trusts will now be caught and trustees would be well advised to make themselves aware of their obligations in this regard.
What is classed as a business relationship?
Bowing to industry concerns, HMRC has meaningfully restricted the application of this definition. To be caught, non-UK trusts will need to have a UK resident trustee and have a business relationship with a UK provider which has 'an element of duration' – interpreted as expected to last 12 months or more.
Whilst this restriction is good news for non-UK trusts, trustees will still need to take care around tax residence. As set out above, the mere fact that all properly appointed trustees are resident outside the UK may not necessarily mean that, for the purpose of these rules, a UK resident person carrying on trust functions in the UK would not be deemed a trustee.
What details need to be registered?
Trusts caught by the 2017 Regulations must continue to provide details in relation to both the trust and the potential beneficiaries. The trust details required are extensive - full name, date of creation, statement of trust accounts/assets, tax residency, administration place, trustees' contact address and full names of advisors providing legal, financial or tax advice to the trustees. The individual beneficiaries' details are equally so, requiring their full name, date of birth, their role relating to the trust, taxpayer reference or residential address and, if non-UK resident, their passport number.
UK taxable Type A, B and C trusts have broadly the same information obligations contained in the 2017 Regulations for both the trust itself and the beneficiaries. However non-UK taxable Type A, B and C trusts are not obliged to provide the above information in relation to the trust itself, but they must provide broadly the same information in relation to beneficiaries and potential beneficiaries. So, Type C trusts which acquire UK land without an SDLT charge (e.g. by gift or via an exempt transfer) have reduced reporting until another tax charge arises, such as a periodic inheritance tax charge.
Interestingly, whilst non-UK trusts holding UK land through a non-UK company do not fall within type C (and are not caught otherwise by the TRS as they are not taxable at trust level), such structures will, from 2021, instead be caught by the Register of Overseas Entities as mentioned below. Given that this Register will not have the same privacy safeguards and penalty regime as the TRS, it would be prudent now to review such structures (if not already).
If there is a non-closed class of beneficiaries, those individuals within its scope can be described on the register as a class rather than individually by name. On a strict reading of the legislation it could be interpreted that this can remain the case even if a benefit is received. However, given HMRC's current interpretation under the FAQs relating to the 2017 Regulations (and taking into account the position under the OECD Common Reporting Standard), we doubt that such an argument would be successful.
Finally, Type A and Type B trusts (regardless of UK tax liability) which hold controlling interests in non-EEA companies will need to provide details of this company for inclusion on the register.
Who can see this information?
Under 4MLD and the 2017 Regulations, the TRS was not publicly accessible. 5MLD and the New Regulations now provide the potential for public access - although it must be remembered that the TRS generally remains closed to the public.
Provided the requestor can show a legitimate interest in the beneficial ownership of the trust, HMRC will need to provide the beneficial ownership details for the trust. However, such requests will need to show that they relate to money laundering or terrorist financing investigations and that there is a reasonable suspicion that the trust is involved. Otherwise, HMRC will not be obliged to provide the information.
There is no requirement for an information request to show legitimate interest where a trust holds a controlling interest in a non-EEA corporate. However, this carve out only applies to Type A and B trusts (regardless of UK tax liability). Significantly, Type C trusts are not included, providing the same enhanced protection for these types of non-UK trusts which acquire UK land – which is important for those deciding how to structure future acquisitions. In its earlier consultation papers, HMRC also indicated that, even where a legitimate interest is not required, it would still want to see that the request had a proper purpose, and the legislation now allows HMRC to impose requirements on the format and content of the request.
Whether or not a legitimate interest is required, the legislation provides that beneficial ownership information will not be handed over if the subject is a minor, lacks capacity or would consequently be exposed to a disproportionate risk of harm (eg kidnapping or extortion). Since trustees are not informed of access requests, it is essential that trustees take proper advice as to how to submit these details at the time of registration.
What happens if trustees don't comply?
The New Regulations have not yet confirmed the penalties envisaged for those who do not comply with the new requirements. However, the second consultation contained a fairly lenient suggestion for penalties, based on a notification or nudge process to encourage compliance. That said, HMRC's responses to the second consultation confirmed that a separate penalty regime is being considered for those who deliberately fail to comply. More will no doubt be divulged shortly.
As a secondary 'mop up', UK advisors and professionals that are obliged to check trusts' beneficial ownership information as part of their 5MLD responsibilities will be expected to report any discrepancies to HMRC. There is a parallel obligation for companies' details being reported to Companies House. HMRC see this as a valuable tool in ensuring that information on beneficial owners is correct going forwards.
We are coming to a position where those holding UK land will need to register beneficial ownership details on one of a number of registers.
Closing the loop for the last type of holding vehicle remaining outside the scope of UK registration, the UK government has committed to create a public register held at Companies House, detailing the beneficial ownership of overseas entities that own UK property. Implementing this register, the Draft Registration of Overseas Entities Bill was issued in July 2018 and is expected to come into effect at some point in 2021. The Register of Overseas Entities will be publicly searchable at Companies House with no restriction. Further, penalties for failure to comply with those registration requirements will (unlike the penalties for mistakes in trust registration) generally be punishable by criminal sanction.
By contrast, the trust register may well be preferable. Accordingly, in determining which structure (if any) would be appropriate for holding UK property, there will be this further layer of considerations to take into account.
What does this mean for non-UK trusts with a UK nexus?
The final outcome is generally good news for non-UK trustees. Seeking UK advice should not generally trigger registration and, even if it did, the Government has, in framing the access capabilities, sought to balance the need for transparency against legitimate privacy concerns. Further, notwithstanding the UK's departure from the EU, registration of the trust on an alternative register in the EEA will be respected, thereby hopefully avoiding duplicate compliance costs.
Of course, there is still the need to take proper advice in relation to any UK nexus, and we would be happy to discuss.