Introduction

In June 2017 the government enacted legislation which imposes significant obligations on trustees to collect, maintain and disclose information about trusts and related individuals, such as the settlor and the beneficiaries. This was part of a Europe-wide initiative to tackle money laundering, organised crime and terrorist financing, which resulted in the introduction of the EU Fourth Anti-money Laundering Directive in 2015.

The information must be provided via Her Majesty's Revenue and Customs' (HMRC's) new online Trust Registration Service (TRS) and the deadline for reporting is fast approaching, with some trustees having to report by January 5 2018 to avoid incurring penalties. The first reporting will be for the 2016-2017 tax year.

New guidance on the practical operation of the TRS register is being issued regularly. HMRC released a set of frequently asked questions on October 9 2017 which dealt with some areas of uncertainty. However, there are still areas of doubt regarding the interpretation of the regulations and areas on which HMRC has yet to provide detail, including the penalty framework that will apply. Discussions between professional bodies and HMRC are ongoing, so it is hoped that these areas will be clarified shortly.

Which trusts does the legislation apply to?

Trusts that must register with HMRC (relevant trusts) are:

  • UK resident trusts; and
  • non-UK resident trusts that receive UK source income or have UK situs assets on which there is a liability to pay:
    • UK income tax;
    • capital gains tax;
    • inheritance tax;
    • stamp duty land tax;
    • stamp duty reserve tax; or
    • land and buildings transaction tax.

The legislation also applies to entities that are similar to trusts (eg, foundations). However, trustees of bare trusts are not subject to reporting.

Obligations on trustees

Trustees of relevant trusts must:

  • maintain accurate and up-to-date records in writing of all beneficial owners (which is defined widely) of the trust and any potential beneficiaries;
  • provide certain information to HMRC (see below);
  • inform any 'relevant persons' (eg, professional advisers and various other regulated persons) that they are acting in their capacity as trustee and, on request, provide information regarding the beneficial ownership of the trust; and
  • on request, inform any law enforcement authorities about the beneficial ownership of the trust.

In relation to paid trustees, there is also an obligation to retain records for five years after a trust is terminated and to delete these records after that period, unless an exception applies. Exceptions include where there is a litigation risk or where consent is obtained from the person to whom the records relate.

What information must be disclosed to HMRC?

Information must be supplied to HMRC regarding the following individuals connected to the trust in question:

  • the settlor;
  • the trustees;
  • any named beneficiaries (in certain circumstances it should be possible to refer to beneficiaries by reference to a class, although the details of these are not yet clear);
  • anyone named as a potential beneficiary in a letter of wishes (or any similar document); and
  • any individual who has control over the trust – this is primarily aimed at protectors, and is defined broadly.

In each case, the trustees must supply personal details such as the individual's date of birth and national insurance number (or their taxpayer reference number).

The requirement to obtain details of individuals who are merely mentioned in a letter of wishes (or other written document from the settlor) is one of the most controversial aspects of the new rules. It is normal for trusts to have a broad range of potential beneficiaries, a number of whom are not intended to receive a benefit except in unexpected and unlikely circumstances. It seems likely that some settlors would feel forced to revise their letters of wishes to remove beneficiaries who have a remote likelihood of receiving a benefit only, in order to avoid the detailed information disclosure requirements for those individuals.

Regarding the trust itself, the trustees must disclose information, such as:

  • the name and date of the settlement;
  • a summary of the assets held by the trust;
  • a valuation of the assets (which should be a good estimate of their market value); and
  • details of any advisers engaged by the trustees to provide legal, financial or tax advice.

How do trustees report to HMRC and what is the deadline for reporting?

All reporting must be completed online through the TRS register.

The general position is that reporting must be completed by either October 5 or January 31 following the end of the relevant tax year. The exact deadline will depend on the type of tax charge that prompted registration and whether it is the first year in which the trustees have had to report.

Trustees should register relevant trusts even if they do not have all of the data required (although it remains to be seen whether the portal will permit registration to be completed where data is missing). However, trustees should take all reasonable steps and efforts to obtain the data and ensure that records are accurate and up to date.

Updating the TRS register

Following registration, trustees are obligated to update information on the TRS register following any tax year in which they are liable for UK tax. If there have been no changes to the information, the trustees must confirm this to HMRC.

According to HMRC, where there is no tax liability in the relevant tax year there is no obligation to update the information on the TRS register.

Penalties

There are civil and criminal penalties for failure to comply with the registration and information disclosure requirements. HMRC may also publish statements censuring a trustee for non-compliance, which include publishing details of the non-compliant trustee on the HMRC website.

Details of the penalty framework are anticipated. The potential issues arising from non-compliance extend beyond the penalties imposed by UK authorities to include reputational damage for the trustee and the possibility of intervention by local regulators (where a trust is non-UK resident).

There is a defence for non-compliance which applies where a trustee has taken all reasonable steps and exercised all due diligence. This is a potentially high bar to relief. Failure to take all reasonable steps and exercise all due diligence will mean that there is no defence available (although the steps that were taken may affect the level of any penalty).

What should trustees be doing now?

With the deadline for first registration looming, trustees should be taking steps to ensure that they are able to meet the deadlines applicable to their trusts in 2017.

Trustees should be focusing on:

  • considering which of their trusts are relevant trusts. Sometimes this will be obvious, but will often require a review of the structure and underlying assets;
  • reviewing the information held with regard to relevant trusts (eg, letters of wishes) and how this affects what the trustees are required to include on the TRS register. This will also involve a review of the terms of the trust deed, especially with regard to persons who exercise control or may be potential beneficiaries;
  • taking steps to obtain any missing information required by the TRS;
  • reviewing standard terms of business, new business documentation, client questionnaires and other standard procedures due to the need to obtain information from persons related to the trust and to disclose it in accordance with the new legislation. This may need to include procedures for the trustee to take in the event that it cannot obtain the required information (so that a trustee can demonstrate taking all reasonable steps and exercising all due diligence should it need to rely on the defence for non-compliance as described above);
  • establishing an annual review process to ensure that any requirement to update the TRS register, or to confirm that there has been no change to the information supplied, is complied with; and
  • training staff on all of these issues.

Further, paid trustees should be establishing procedures to ensure compliance with the requirement to retain and destroy trust records. These procedures will include file reviews to establish whether litigation risks exist and obtaining consents to retain information beyond the five-year period, if necessary in the circumstances.

Examples of the circumstances under which trusts should or should not be required to report according to the latest guidance include the following:

  • A non-UK trust with a non-UK subsidiary company, which owns UK investments – in this case, if the trustee does not directly receive any UK source income, nor directly hold any UK situs assets, then it should not be required to register with the TRS. Interestingly, HMRC's guidance suggests that there will be no need to report if assets are held through a non-UK nominee company, but this surprising interpretation of the regulations may be vulnerable to change.
  • A non-UK trust has been registered and the details of the trustees change in the following tax year. The trust does not receive any UK income or hold any UK situs assets – in this case, the trustee is not obliged to update the register.
  • The trust deed includes within the class of beneficiaries a friend of the settlor, who is to benefit only if other named beneficiaries pass away – in this case, HMRC takes the view that if the trustee can clearly identify a beneficiary then their name and details should be disclosed, even if they are merely within a class of potential beneficiaries.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Anthony Thompson at Forsters LLP by telephone (+44 20 7863 8333) or email (anthony.thompson@forsters.co.uk). The Forsters LLP website can be accessed at www.forsters.co.uk.