New regulations which came into force in June this year will make it a requirement for trustees to obtain and hold up-to-date details of the beneficial owners of their trusts on record and to register these annually with HMRC where the trust is liable to pay tax in the UK.
Given that the use of trusts is fairly common in real estate holding structures and the HMRC penalties for failure to comply could potentially be severe, trustees should ensure they are familiar with these reporting requirements.
However, apart from in a relatively small number of cases suggested below, we would not expect these rules to be of widespread application to trusts across the Real Estate sector.
The rules, which are part of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017, came into force in June this year and the registration deadlines are imminent (the first such deadline being 5 January 2018).
Trustees will have to register trust details using the new online Trusts Registration Service (TRS), a new service that will provide a single online route for trusts and complex estates to comply with their registration obligations and to obtain their Self-Assessment (SA) Unique Taxpayer Reference (UTR).
2. Which trusts are affected?
The new regulations will affect:
UK resident trusts, incurring UK taxes (as listed below) on trust income or assets directly held by the trust; or
- non-UK trusts, where a UK tax liability (as listed below) is triggered in respect of UK source income or UK assets held directly by the trust.
The UK taxes that trustees have to incur in a given tax year to require them to register their trust or update existing trust data on the TRS are:
- income tax
- capital gains tax (CGT)
- inheritance tax
- stamp duty land tax (SDLT)
- stamp duty reserve tax (SDRT)
- land and buildings transaction tax (Scotland).
However, if after claiming a tax relief the trustees have not incurred a liability, in a given tax year, to any of the above taxes, HMRC would not expect them to register on the TRS.
3. Who is responsible for completing the registration process?
It is the trustees' responsibility to register details of the trust, although trustees can appoint an agent to do so on their behalf. If a trust has multiple trustees, then the trustees can nominate one to act as the 'lead' trustee. The 'lead' trustee is then responsible for the administrative duties in relation to the tax affairs of the trust, and will act as the main contact point for HMRC.
4. What details will be required to be registered?
The TRS will require submission of the following details annually:
details of the trust and its assets, including addresses of UK properties, and a market valuation of assets held at the date that the assets were settled; and,
the identity of the settlor, trustees, any person exercising effective control over the trust and the beneficiaries or class of beneficiaries (including potential beneficiaries, where individual beneficiaries have yet to be determined or identified).
In particular, the specific information required to be provided for each beneficiary will include:
date of birth;
National Insurance number if they are UK resident and over 16 years of age, or a Unique Taxpayer Reference (UTR), if any;
address and passport or ID number for non-UK residents.
Where beneficiaries are only defined by reference to a class, then a description of the class should be recorded on the TRS. However, if a member of the class of beneficiary can be identified by name, then his or her details needs to be recorded.
5. Who can view the register of trusts?
This online trusts register will not be publically available, but will be accessible by HMRC and certain law enforcement bodies (including, the Financial Conduct Authority, Serious Fraud Office and National Crime Agency).
6. What are the deadlines for registration?
The deadlines for registration depend on whether the trust is already registered for Self-Assessment. The below deadlines apply accordingly:
Existing trusts already registered for SA must register on TRS by 31 January 2018.
N.B. although the legislation came into force on 26 June 2017 this deadline of 31 January 2018 applies in respect of the tax year 2016-17. This also applies to non-UK resident trusts that incurred a UK tax liability in 2016-17.
Trusts that have incurred an income tax or CGT liability for the first time in the tax year 2016-17 (those not previously registered for SA) must register on TRS by 5 January 2018.
Trusts not already registered for SA, or those who have no need to register, but have incurred inheritance tax, SDLT, SDRT or land and buildings tax in that tax year must register by 31 January after the end of that tax year.
7. What are the penalties for failure to register?
Failure to meet the reporting deadlines will result in penalties, such penalties to be set out in a future penalty framework due to be published by HMRC in the near future. As such, there remains uncertainty as to how severe the penalties imposed will be for failure to meet the deadlines.
8. How will these obligations affect trusts involved in real estate activity?
In the commercial real estate world, trustees are unlikely to be required to register trusts under these new rules because they will not normally be liable to pay income tax, CGT, inheritance tax, SDLT/land and buildings transaction tax or stamp duty reserve tax in any given tax year. However, trustees of unit trusts that incur SDLT on real estate acquisitions and nominee bare trustees who incur SDLT on grants of new leases will be caught under these new TRS registration and reporting requirements. Trustees who own UK real estate assets through an underlying company/investment vehicle will fall outside these obligations because the UK tax liability will be incurred by the company and not the trustee. The trust may therefore have no UK tax exposure itself.
As for residential real estate (as well as, with effect from April 2019, commercial real estate), the extension of certain CGT provisions to non-residents will potentially bring more trustees under the scope of these new registration requirements.
Overall, given that the use of trusts are fairly common in real estate holding structures, trustees will need to be made aware of these rules and be asked to confirm whether or not they are experiencing or foresee challenges with complying with these requirements. In particular, it can be difficult to identify the beneficial owners in some structures. Trustees will need to ensure systems are in place to procure this registrable information routinely and in any event, well in advance of annual deadlines.