The Trust Registration Service

Move to transparency

The past few years have 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 non-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). The second is to meet HMRC’s obligations to collect the information required under the Regulations by requiring the trustees of "relevant taxable trusts" to populate the new Trust 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 inspections.

In addition to the Trust Register, the trustees of "relevant trusts" are 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.

HMRC published guidance in the form of a series of FAQs on 9 October 2017 which sets out their interpretation of the relevant parts of the Regulations and explains how they intend the TRS to work in practice. There are, however, still a few areas of uncertainty and contradiction which HMRC have subsequently acknowledged. This note reflects our understanding of HMRC's approach based on the FAQs as currently published but supplemented by their subsequent pronouncements.

Key terms: which non-UK trusts does this affect?

All "relevant trusts" fall within the new record keeping obligations introduced by the Regulations.

As well as affecting all UK resident express trusts (which are covered in a separate briefing note which can be found here), the term "relevant trust" also includes any non-UK resident express trust which has UK source income or directly held UK assets.

An "express" trust is a trust established deliberately by a settlor as opposed to a statutory, resulting or constructive trust. HMRC have confirmed that unit trusts are not within the definition of express trusts and fall outside the scope of the TRS. This includes unauthorised and offshore unit trusts.

A relevant trust is 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, directly held UK assets, or assets (and income arising on those assets) held through an underlying entity which is "look through" for relevant tax purposes (e.g. a nominee or a partnership).

It is important to note that the UK tax liability must fall on the trustees directly and that taxable assets must, in most cases, be held directly. This means that the following scenarios will not create taxable relevant trusts:

• A circumstance in which a UK tax liability is attributed to someone other than the trustees (e.g. a beneficiary under a life interest trust where income is directly mandated) so that the trustees have no further UK tax liability for the year in relation to directly held assets.
• A non-UK resident trust with no UK resident beneficiaries which receives UK source dividend income (because the trustees have no liability to pay any of the relevant taxes in those circumstances).
• A trust which only has liability to VAT in any year (because this is not a relevant tax).
• A trust which would have had a UK tax liability but for a relief (including relief which is claimed under a double tax treaty).
• A bare trust.
• A trust with a de minimis UK tax liability (less than £100 on a bank or building society interest income).

Since the FAQs were published, HMRC has confirmed that the holding of UK assets through a nominee would not prevent the trust from being a taxable relevant trust even though legal ownership of the assets is not direct, because the tax liability arising from the UK asset falls on the trustees directly.

Non-UK trusts can fall in and out of the TRS regime depending on when the relevant UK tax liability arises. For example, a non-UK trust which directly holds a non-income producing UK asset will only be a taxable relevant trust for a year in which an inheritance tax decennial or exit charge arises. It will, however, still be a relevant trust for as long as it holds that asset so will have on-going internal record keeping obligations.

It seems that a non-UK trust which has purchased UK shares directly would still need to register using the TRS even if the SDRT payable on the transaction (which would normally be deducted automatically if settled through CREST) was the only foreseeable UK tax nexus for the trust (for example, because the trust has no UK resident beneficiaries and the value of the UK is below the nil rate band). HMRC have now indicated that shares purchased through a custodian which is liable for the SDRT would also trigger a registration obligation. The obligation extends to stamp duty on unlisted shares because the payment of stamp duty will cancel an SDRT charge that may otherwise arise. The trust would then remain on the Register, but the information would not need to be updated unless and until another relevant UK tax charge arose for the trustees. 

Relevant dates

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 TRS rather than the old paper system (Form 41G (trusts) having been withdrawn). For non-UK trusts, this will normally only be the case if the trustees receive UK source income and at least one beneficiary is resident in the UK.

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 5 October 2017). For this year only the deadline has been extended to 5 January 2018 to allow all parties to get to grips with the new system (to which agents were only given access on 17 October 2017).

The deadline for populating the Trust Register with information about beneficial owners 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 non-UK trust was already registered for self-assessment with HMRC but has been wound up since 6 April 2017, 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 in order to pay the tax, but does not need to populate the Trust Register with additional information.

For the first year only, 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 5 March 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 Register.

The relevant dates can be summarised as follows:

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.

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 (including any attorney appointed by the trustees);
• The beneficiaries (and potential beneficiaries); and
• Any individual who has control over the trust, which could include a protector.

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 current trustees and beneficial class at the date of registration must be disclosed. When the Register is updated each year, any former beneficiaries and trustees will be removed from the record and will no longer appear on the Register.

Identifying beneficiaries individually or by class?

This has perhaps been the most controversial area of the TRS for trustees as when first published, the guidance appeared to be wider than the disclosure obligations under other regimes such as CRS. The scope has since been narrowed somewhat by a change in approach from HMRC.

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. However, if a named beneficiary may only benefit subject to a contingency (e.g. contingent on the deaths of all other named beneficiaries), they need only be named if and when the contingency is fulfilled. 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”) HMRC have confirmed that a trustee will only need to disclose the identity of the beneficiary when they receive a financial or a non-financial benefit from the trust after 26 June 2017 - the commencement of the Regulations.

This is a change in approach to HMRC's initial stance, which would have required the trustees to identify and provide the prescribed information on all living members of a class. HMRC's change in approach likely goes to the fact that their initial guidance went further than the Regulations require. The Regulations state 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.

In addition, the Regulations should be read 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.

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 contributed 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, 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.

Record keeping obligations

All relevant trusts 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 only 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 a 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, it 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.

Having said that, the draft EU Fifth Anti-Money Laundering Directive (5AML) does include a proposal to make all beneficial ownership registers "public" to a greater degree, so the progress of this will need to be monitored. Specifically 5AML proposes that access to data on beneficial owners of trusts will be freely accessible to the authorities and regulated professionals. In most respects, this level of access is already envisaged by the Regulations currently in force, but it remains to be seen whether "persons with a legitimate interest" will cause the scope to be expanded in due course.

Penalties for non-compliance

Trustees are expected to take “all reasonable effort and steps” to obtain and update the information requested and will not be committing an offence if they can show that they have. Record keeping will be all the more important in this context.

There are both civil and criminal penalties for non-compliance (including the imposition of “appropriate” financial penalties, public statements of censure and up to two years imprisonment). HMRC can charge penalties for administrative offences. These include 1) a failure to register using the TRS by the due date; and 2) a failure to notify of any change of information by the due date (refer to the relevant dates section above). HMRC will charge a fixed penalty to reflect the period of delay:

• Registration up to three months late - £100;
• Registration up to six months late - £200; and
• Registration over six months late - the greater of 5% of the tax liability or £300.

However, a penalty will not be payable if HMRC are satisfied that reasonable steps were taken to comply with the Regulations. HMRC also has the power to apply a penalty for money laundering offences under the Regulations and will consult on the structure of those penalties later this year. HMRC has noted in the guidance that any civil penalty imposed must be proportionate to the offence committed and that there will be a robust appeals process.

Enforcement of such penalties against non-UK trustees in other jurisdictions may bring practical difficulties, but most trustees will be more concerned about reputational issues resulting from non-compliance. However, trustees in non-EU jurisdictions with strict privacy laws will need to consider how to balance these conflicting obligations, and may require specific domestic legislation allowing them to make disclosures in these circumstances.

What should trustees be doing now?

Trustees should review their assets and income to determine whether trusts they administer are relevant trusts, and whether it would be appropriate to put corporate blockers in place before a relevant tax charge arises. Trustees should be particularly careful if they have made loans to anyone in the UK, as this could be a UK asset and, if interest bearing, produce UK source income.

Information should, in any event, be collected now in relation to relevant trusts for which internal record keeping obligations are current and on-going.

Trustees should also be considering, in conjunction with settlors and beneficiaries as appropriate, whether the beneficial class wording in the trust or in written documents from the settlor is suitably drafted. It may be prudent to include only those who have a real prospect of benefitting from the trust in order to reduce the due diligence, reporting and record keeping burden on the trustees.