On 22 June 2017 the UK government implemented the fourth iteration of the EU’s anti-money laundering directive by enacting The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “Regulations”).
The Regulations broaden the scope of the current anti-money laundering and terrorism financing regime, with effect from 26 June 2017. Also contained within them are considerable new obligations on trustees and measures that increase the transparency and reporting of those who are connected to trusts, with significant privacy implications for individuals who seek trusts for legitimate confidentiality reasons.
The new rules introduce onerous obligations on trustees to maintain, report and disclose information on the ‘beneficial owners’ of ‘relevant trusts’. In particular, trustees are now required to:
- maintain accurate and up-to-date records in writing of all beneficial owners of a relevant trust;
- submit such information to HMRC to be kept in a new central register of trusts; and
- confirm to certain third parties that they are acting as a trustee when they enter into a relevant transaction or business relationship with them and, on request, provide information identifying the beneficial owners with any changes reported within 14 days.
What is a ‘Beneficial Owner’?
The Regulations include a very broad definition of beneficial owner, which goes beyond the general understanding of the term (and differs from the definitions applied in other transparency / reporting regimes such as the Common Reporting Standard and FATCA) to include:
- the settlor;
- the trustee;
- the beneficiaries where individuals are identified (including potential beneficiaries);
- where individuals (or some of the individuals) benefiting from the trust have not yet been determined, the class of persons in whose main interest the trust is set up or operates; and
- any individual with “control” over the trust (more on which below).
The Regulations consider an individual with the power (whether exercisable alone, jointly with another person or with the consent of another person) under the trust instrument or by law to, broadly, (a) deal with trust property, (b) vary or terminate the trust, (c) add or remove beneficiaries or trustees or give another person control over the trust or (d) direct, withhold consent to or veto the exercise of the aforementioned powers, to have “control” over the trust. This captures a broad range of individuals, including protectors.
The new rules extend to ‘potential beneficiaries’ who are identified in a trust document, including in a letter of wishes from the settlor. The Explanatory Memorandum accompanying the Regulations explains that such person must clearly stand to benefit from the trust as a result of the settlor’s express wishes, but would not include a person who is named in a document but is unlikely to benefit (and no further guidance is provided as to what is meant by “unlikely to benefit”). This will only be a concern for individuals named in a letter of wishes who are not already expressly identified as a beneficiary in the trust instrument.
What trusts are caught by the new rules?
The rules capture a broad range of trusts that have specific UK connections. Relevant trusts fall into the following two categories:
UK express trusts
An “express trust” is not defined but, put simply, is any trust created deliberately. For the purpose of the Regulations, a trust is a UK trust if either:
- all the trustees are resident in the UK; or
- the following:
i) at least one trustee is resident in the UK; and ii) the settlor was resident and domiciled in the UK at the time the trust was set up or funds were added to it.
Constructive and resulting trusts therefore fall outside the scope of the new regime. It seems reasonable to assume from the context that bare trusts do as well, but this is not clear from the Regulations.
Non-UK express trusts
A non-UK express trust will be subject to the new requirements if it:
- receives UK source income; or
- holds assets situated in the UK,
in respect of which it is liable to pay certain UK taxes, including Income Tax, Capital Gains Tax (CGT), Inheritance Tax (IHT), Stamp Duty Land Tax, Land and Buildings Transaction Tax (Scotland) Act 2013 (in Scotland) or Stamp Duty Reserve Tax.
Corporation Tax, Annual Tax on Enveloped Dwellings and Value Added Tax are not relevant taxes for these purposes.
A detailed analysis of the impact of the Regulations on non-UK trusts can be found here.
For completeness, the new rules also apply to foundations and other legal arrangements similar to a trust. Unlisted UK bodies corporate must also maintain enhanced records and provide certain specified identification information to relevant persons or law enforcement agencies on request.
What records do trustees need to keep and what information will be included on HMRC’s register?
The Regulations require trustees to maintain accurate and up-to-date records in writing of all the beneficial owners (and potential beneficiaries) containing the following information:
1. Administrative details in relation to the trust, including:
- the full name of the trust;
- the date on which the trust was set up;
- a statement of accounts for the trust, describing the trust assets and identifying the value of each category of trust assets at the date on which the information is first provided (including the address of any property held by the trust) (this is very far reaching and it will cover all trust assets, not just UK ones);
- the country where the trust is considered to be resident for tax purposes;
- the place where the trust is administered;
- a contact address for the trustees; and
- the full names of any advisers who are being paid to provide legal, financial or tax advice to the trustees in relation to the trust.
2. A significant amount of sensitive personal data for each beneficial owner, including:
- full name;
- date of birth;
- details of the individual’s role in relation to the trust; and
- National Insurance number or unique taxpayer reference, or if the individual has neither of these, then the individual’s usual residential address; or
- if this residential address is outside the UK, then either:
- the individual’s passport number or identification card number, with the country of issue and the expiry date of the passport or identification card; or
- if the individual does not have a passport or identification card, the number, country of issue and expiry date of the equivalent form of identification.
This information must be submitted to HMRC for inclusion in the trust register.
Further, when a trustee enters into a ‘relevant transaction’ with a ‘relevant person’, or forms a business relationship with them, the trustee must:
- inform the relevant person that it is acting as trustee; and
- provide information on the beneficial owners on request, with any changes to such information notified within 14 days from the date on which any one of the trustees became aware of the change.
Relevant persons are, in essence, professionals (including independent legal professionals, tax advisors, trust or company service providers, amongst others), financial intermediaries and others who are regulated under the Regulations and required to conduct due diligence.
Note that for a trustee who is a ‘relevant person’ and is being paid to act as a trustee, the Regulations require them to retain the records for a period of five years after the date on which the final distribution from the trust is made. At the end of this period, the trustee must arrange for the records to be deleted unless they:
- are required to keep them under another enactment or court proceeding,
- have obtained the consent of those mentioned in the records to retain them, or
- have reasonable grounds for believing the records need to be retained for the purpose of legal proceedings.
In practice, it may be simplest for trustees to obtain blanket consents from beneficial owners to retain the information for longer than this five year period.
Who will have access to HMRC’s register?
For the time being, HMRC’s register will only be made available to law enforcement agencies such as HMRC, the Financial Conduct Authority and the Serious Fraud Office, amongst others. However, there is a push for the register to be publicly available, in the form of a proposed amendment to the EU’s Fourth Anti-Money Laundering Directive.
If this proposal eventually becomes law, the confidentiality previously provided by trusts will be lost.
When do trustees have to register with HMRC?
The Regulations have been in force since 26 June 2017 and at first glance it would seem that relevant trusts must be registered by 31 January 2018.
However, a number of intervening deadlines are also indirectly derived from other UK tax legislation. For example, trustees of a relevant trust which was settled in the tax year 2016/17, or only became liable to IHT or CGT for the first time in that year, and which has yet to register with HMRC, will only have until 5 October 2017 to register.
What are the penalties for non-compliance?
The penalties for non-compliance are potentially severe. At one end of the scale, civil penalties include censure and/or an ‘appropriate’ fine (which is defined as being effective, proportionate and dissuasive). More serious infringements, however, risk criminal sanctions including a term of imprisonment of up to two years.
Those affected by the new regime may take some comfort from the ‘good faith’ provisions which means that a person may have a defence if they took all reasonable steps and exercised all due diligence to avoid committing the offence.
What actions need to be taken now?
Trustees should consider whether the legislation applies to them immediately, and begin the information gathering exercise. It may be the case that trustees have undertaken a similar exercise in relation to their obligations under the Common Reporting Standard and FATCA, but because of differences in the relevant legislation, and particularly in the definitions of “beneficial owners”, they will still need to take action in relation to the Regulations.
Trustees should also review their record retention policy and ensure that they obtain the consent of the beneficial owners to retain the records for longer than a five year period from the date of the last distribution. The extent to which trustees can delegate the obtaining and retention of the information required by the Regulations to advisers such as lawyers and/or accountants is not yet clear, and it would be prudent for at least one trustee to be responsible for keeping these records.
The Regulations are complex in many aspects, and we would be happy to provide guidance that is tailored for an individual trust.