Move to transparency
The past few years has seen an increased burden on trustees in relation to reporting obligations in the context of FATCA and the Common Reporting Standard. They must now get to grips with a new set of record keeping and disclosure obligations introduced by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “Regulations”) which came into force from 26 June 2017 to enact the EU Fourth Money Laundering Directive (EU 2015/849).
The main impact of the Regulations from the perspective of UK resident trustees is the introduction by HMRC of a new Trust Registration Service (TRS). This serves two purposes. The first is to digitise the registration of trusts for self-assessment purposes (replacing the existing paper form 41G (Trust)). The second is to meet HMRC’s obligations to collect the information required under the Regulations by requiring the trustees of all “relevant taxable trusts” to populate the register with certain information on their settlors, beneficiaries, power holders and assets.
This information is, in some respects, significantly wider than information which has to be disclosed in other contexts (for example CRS). The good news however is that the register is not open to public inspection.
In addition to the Trust Register the trustees of “relevant trusts” are also obliged to maintain extensive internal written records relating to the trust’s beneficial owners and potential beneficiaries which they must share on request from law enforcement authorities and other bodies which have AML client due diligence obligations (such as banks and investment managers).
HMRC published guidance in the form of a series of FAQs on 9 October 2017 which set out their interpretation of the relevant parts of the Regulations and explain how they intend the TRS to work in practice. There are, however, still a few areas of uncertainty and contradiction which need to be resolved.
Key terms: which trusts does this affect?
All “relevant trusts” fall within the new record keeping obligations introduced by the Regulations. A “relevant trust” will include all UK resident express trusts.
The Regulations also extend to non-UK trusts. The effect on and obligations for non UK resident trustees is covered in a separate practice note which can be found here.
All “taxable relevant trusts” must report annually using the TRS.
A relevant trust becomes a “taxable relevant trust” in any year in which the trustees are liable to pay income tax, capital gains tax, inheritance tax, stamp duty land tax (SDLT), stamp duty reserve tax (SDRT) or land and buildings transaction tax (in Scotland) (referred to as the “relevant taxes”) on any UK source income or directly held UK assets.
It is important to note that the UK tax liability must fall on the trustees directly and that that taxable assets must be held directly. This means that the following UK trusts will not be taxable relevant trusts:
- A trust which only has liability to ATED or VAT in any year (because these are not relevant taxes).
- An interest in possession trust where the whole of the trust income is mandated to the life tenant beneficiary, unless that trust also has other tax liabilities such as on capital gains.
- A charitable trust, unless it has incurred a liability to pay any of the relevant taxes – which would normally only apply to a charity with a trading subsidiary or which receives other non-exempt income. Nevertheless, all charitable trusts now have an obligation to keep written records in relation to the charity’s beneficial owners.
- A trust which would have had a UK tax liability but for a relief (for example hold-over relief on otherwise chargeable capital gains).
- A bare trust, but all bare trusts also now have an obligation to keep written records in relation to actual and potential beneficial owners.
As has always been the case, trustees will need to register for self-assessment the first time they have a UK income tax or capital gains tax liability, but they are now required to use the web-based TRS rather than the old paper system (Form 41G (trust) having been withdrawn).
The registration deadline for self-assessment has not changed, and falls 6 months after the end of the tax year in which the UK tax liability first arose (e.g. for the tax year ended 5 April 2017 the deadline would normally be on 5 October 2017). For this year only the deadline has been extended to 5 December 2017 to allow all parties to get to grips with the new system (to which agents will only have been given access in October).
For all other trusts the deadline for populating the trust register falls on 31 January following each year in which a relevant tax liability arises. The first relevant year is 2016/17, even though the Regulations only came into force in the current tax year. However, if a UK trust was already registered for self-assessment with HMRC but has been wound up either in the 2016/17 tax year or subsequently in the period between 6 April 2017 and 31 January 2018, it does not need to be included on the register. A trust which was wound up since 6 April 2017 but was first liable to UK tax in 2016/17 will still need to register.
So, any trusts which have already registered for self-assessment under the old regime or which have a relevant tax liability other than income tax or capital gains tax in 2016/17 have until 31 January 2018 to provide the relevant information.
Taxable relevant trusts will then need to update the register by 31 January after the end of each tax year with any changes which occurred in the preceding year, or confirm that no changes have occurred. However, changes can be made to the register at any time, and in practice trustees will need to ensure that their internal records are up to date at all times in any event. Note that trusts which are not taxable relevant trusts for the year do not need to update the Trust Register.
The relevant dates can be summarised as follows:
|5 December 2017||Deadline for trusts with a UK income tax or capital gains tax liability for the first time in 2016/17 to register for self-assessment using the TRS|
|31 January 2018||Deadline for registering all other taxable relevant trusts with a relevant tax liability in 2016/17 using the TRS|
|5 October 2018 (and later years)||Deadline for trusts with a UK income tax or capital gains tax liability for the first time in 2017/18 to register for self-assessment using the TRS|
|31 January 2019 (and later years)||Deadline to notify HMRC of any changes (or confirm no changes) on the TRS if the trust had a relevant tax liability in 2017/18 or to register a trust for the first time if it has a relevant tax liability in 2017/18 other than income tax or capital gains tax|
What information needs to be provided on the Trust Register by taxable relevant trusts?
The full list of information required is beyond the scope of this note, but the recently published FAQs have shed further light on the scope of some of these categories, although there are still some areas of uncertainty.
The purpose of the TRS is to identify the “beneficial owners” of taxable relevant trusts. These are considered to be:
- The settlor(s)
- The trustees
- The beneficiaries (and potential beneficiaries)
- Any individual who has control over the trust, which is likely to include a protector and anybody who has the power to change the trustees.
The first point to note is that information must be current and up to date, so if there are changes between now and the relevant registration or updating deadline, the outdated information can be disregarded. For example if a trustee or beneficiary is removed or added in the interim period, only the trustees and beneficial class at the date of registration need to be disclosed, and former beneficiaries and trustees should not be registered or should be removed.
Identifying beneficiaries individually or by class?
This has perhaps been the most controversial area of the TRS for trustees as it appears to be wider than the disclosure obligations under other regimes such as CRS.
The Regulations refer to “the beneficial owners of the trust and any other individual referred to as a potential beneficiary”.
It is clear that any individual named in a trust or in a related document written by the settlor (e.g. a letter of wishes) as a potential beneficiary must be disclosed, even if their prospects of actually benefitting are remote (e.g. a default beneficiary). HMRC have confirmed that third party reports of the settlor’s wishes (for example in a solicitor’s attendance note) would not be considered as a “document written by the settlor” for these purposes.
Where there is a class of beneficiaries (e.g. “the settlor’s descendants”) the FAQs include seemingly contradictory examples: does the requirement extend to identifying all individual members of a class who are in existence and providing information on each of them, or is it sufficient to describe the class and to identify only those individuals who have actually received a benefit? Since the publication of the FAQs, HMRC have confirmed their view that any member of a class who can be identified (for example, when born) should be included on the Register.
Clearly the conservative approach in light of HMRC's stated expectations is for trustees to disclose the personal details of all individual members of a class who can at that stage be determined, for example, the settlor’s living children and grandchildren, as well as describing the class.
It should be noted, however, that HMRC's guidance goes further than the Regulations require. The Regulations suggest that a distinction should be drawn between a closed class and an open class of potential beneficiaries. It is stated that where the beneficial owners include “a class of beneficiaries, not all of whom has been determined” then only a description of the class needs to be provided, and there is a specific carve-out from providing information on individual beneficiaries in these circumstances. HMRC may be persuaded to reconsider their guidance in light of this.
In addition, it may also be reasonable for trustees to interpret the Regulations in light of the wider guidance on concepts of beneficial ownership in similar AML contexts. For example the recommendations published by the Financial Action Task Force in relation to beneficial ownership in the context of CDD suggest that it should be adequate for financial institutions to establish the identity of a beneficiary at the time of a payout or when the beneficiary intends to exercise vested rights. This would seem to be a proportionate obligation in light of the purpose of the Regulations to combat tax evasion and other forms of money laundering.
In this context it is worth noting that personal data obtained by HMRC or any other relevant person for the purposes of the Regulations may only be processed for the purpose of preventing money laundering or terrorist financing, which may assist with an argument that the Regulations should be interpreted in the narrower sense.
Disclosure of Trust Assets
The details of directly held trust assets, including the addresses of any UK real estate, needs to be reported on the Register alongside a valuation of the assets when they were first added to the trust. It seems that HMRC are taking a pragmatic approach to valuation (as they did under the old regime) and will not expect formal valuations to be obtained. If a valuation has already been provided on first registration in a form 41G (Trust), the exercise will not need to be repeated.
The requirement is to disclose all trust assets on registration, not just those which have triggered a UK tax consequence.
Details of Advisers
HMRC have clarified that the obligation to report the identity of all advisers who are being paid to provide legal, financial, tax or other advice to the trustees extends only to details of the agent (if any) who is acting on the trustees’ behalf in relation to these registration requirements.
Although not part of the TRS requirements under the legislation, HMRC are intending (now that the paper from 41G (Trust) is obsolete) to use the TRS as the method by which a complex estate registers with HMRC for self assessment. Therefore, Executors of complex estates will need to adopt the same online registration process as trusts, but will not otherwise have an information reporting obligation.
Complex estate is defined as an estate where one or more of the following applies:
- the Estate is valued at over £2.5m;
- there is tax due for the entire administration period of over £10,000;
- the Estate makes asset sales of over £500K (£250K for deaths prior to April 2016).
As complex estates are not specifically included in the legislation, the penalty provisions will not apply for non-compliance but normal penalties in relation to tax compliance filing obligations will.
If ongoing trusts are created from the residue of an estate, those trusts will only need to be registered at the end of the administration period.
Record keeping obligations
Separately from the obligations under the TRS, all relevant trusts (including charitable trusts in receipt of income which is exempt from tax) are required to maintain accurate and up to date written records relating to the trust’s beneficial owners and potential beneficiaries which they must share on request from law enforcement authorities and other bodies who have AML client due diligence obligations (e.g. investment managers, law firms and banks). Records are to be kept for 5 years from the final distribution and (normally) deleted thereafter. Anyone to whom this information is communicated in a business context must be notified of any changes within 14 days.
Who can access this information?
Under the Regulations, access may be given to named law enforcement agencies in the UK, and other EEA countries through the National Crime Agency.
Some parties have expressed concern that “persons with legitimate interest with respect to money laundering, terrorist financing…[etc.]” (e.g. NGOs or investigative journalists) could challenge the scope of the Regulations as this wording is included in the original EU Directive. When a similar trust register was created in France, in was initially announced that this would be made public, until this was held to be incompatible with other rights in French law. Moreover, it would seem unlikely that wider public access would be permissible under European data protection laws, especially once these are strengthened by the General Data Protection Regulation coming into force next year.