As of June 2017, all trustees must get to grips with a new set of record keeping and disclosure obligations as a result of the introduction of the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which came into force on 26 June 2017, in order to enact the EU Fourth Money Laundering Directive (EU 2015/849). These requirements are potentially far-reaching and significant, and have implications for most UK resident trusts, together with any non-UK resident trusts which have income from a UK source, or UK assets on which they become liable to UK income tax, inheritance tax, stamp duty land tax, or stamp duty reserve tax. The rules also apply to relevant complex estates, charitable trusts, corporate trusts, employer related trusts, pension funds and flat management companies.
From a trustee’s perspective, the main impact of the Regulations is HMRC's implementation of a new Trust Registration Service (TRS) which has two purposes: The first is to meet HMRC's obligation under EU law to maintain a register of specific information by requiring the trustees of taxable, relevant trusts to provide up-to-date information on their beneficiaries. The definition of beneficiaries includes settlors (even if dead), details of the trustees themselves, beneficiaries, and the names and details of those who are able to exercise control over the trust. Importantly, if the trust generates a tax consequence, trustees must provide HMRC with the beneficial ownership details (including addresses and valuation) of the trust's assets including any UK property. This obligation extends to all trust assets, not just those that have a UK tax liability. The second is to move away from the old 41G paper form to a new digital register of trusts, to be used in cases where trustees are required to pay UK tax, including income and capital gains tax. At the moment, the Trust Register is not open to public inspection, although this may change if the EU's Fifth Money Laundering Directive is introduced, which will be an added concern for those who do not wish details of their estates/assets to be open to public scrutiny.
Even if they are not required to register on the Trust Register, the trustees of relevant trusts, including express trusts, are required to maintain comprehensive and up-to-date, written records relating to the trust’s beneficial owners and potential beneficiaries. If required, this information must be shared with law enforcement bodies, including the Police and other organisations that have anti-money laundering responsibilities.
So what does all this mean in practice? Certainly for professional estate administrators, and trustees, there will be a significant increase in the administration overhead which will potentially drive up costs.
The record keeping aspects of the new regulations are extensive and require the identification of all beneficial owners and potential beneficiaries which are referred to by the settlor in documents relating to the trust, such as a letter of wishes. Advisers may therefore consider asking settlors to review their letters of wishes in the light of the new regulations. Professional trustees must also retain these records for five years after the date on which the final distribution was made from the trust. Given the onerous nature of the new Regulations, and the likely associated increase in costs, settlors may wish to consider instituting other arrangements as an alternative to setting up a trust.
There are also implications for professional trustees regarding their duty of confidentiality towards their beneficiaries. While the legislation as it currently stands ensures that trustees cannot be held liable for making disclosures under the Regulations in the UK, this is not likely to be helpful for those whose trusts are governed by non-UK law and so this is an area which will require careful management.
Furthermore, although it is not necessary to automatically register a will, solicitors need to be aware that if they create an express trust which generates a tax liability, the beneficial ownership of the trust will need to be registered with HMRC through the TRS.
Lastly, and perhaps most importantly, apart from enacting the EU Directive, one of the main aims of the legislation from an HMRC perspective is to increase transparency, and so the ability to 'hide' assets within complex trust arrangements for avoidance purposes, will be significantly reduced. This could have a major impact in matrimonial disputes but could also affect trust disputes in a wider sense. In practice, it could provide solicitors and other professionals with a useful source of information which has only previously been available after much detailed searching.
The final question concerns what could happen to trustees who are non-compliant? The bad news is that there are likely to be both civil sanctions including prohibiting trustees from performing related management roles and functions, and criminal sanctions which include up to 2 years' imprisonment, a fine, or both.