Recent years have seen an ever-increasing drive on a global scale to combat the threats of tax evasion, money laundering and terrorist financing, with trusts often falling into the scope of regulators as they are often seen as a vehicle for shielding assets and disguising ownership.
In line with the EU’s Fourth Anti-Money Laundering Directive (4AMLD), which was transposed into UK law in 2017, HMRC has had to maintain its Trust Register Service (TRS) for some years now. This has required trustees of certain trusts to provide certain information in relation to the trust and its beneficial owners which is held on that register. Under the Directive, trustees of relevant trusts (broadly, UK express trusts, or non-UK resident trusts that are taxable in the UK on UK source income, or UK situs assets) are also required to keep accurate and up to date written records of the beneficial owners of the trust, and of any potential beneficiaries referred to in a document from the settlor relating to the trust. For this purpose, beneficial owners include the settlor, trustees, protector or other persons with control over the trust, together with beneficiaries, and the records should include full names, dates of birth, and national insurance numbers. All these details are of high importance, and trustees should be in a position to provide them on request when entering into any new business relationship.
Furthermore, where a relevant trust is also considered taxable in the UK, the trustees are further obliged to upload these details to the TRS, together with other information on the creation of the trust, its place of administration, and details and values of any assets originally settled on it. Additionally, the TRS is now the only way for a trust to obtain a Unique Taxpayer Reference (UTR), with form 41G having been put into retirement by HMRC and combined with the trust register.
In spite of these requirements however, it is likely that trustees of many non-taxable trusts are not keeping the records they are obliged to, which has made further change to the policy around trust registration necessary.
Expanding obligations under 5AMLD
At the start of the year, we saw the implementation of the EU’s Fifth Anti-Money Laundering Directive (5AMLD), which was implemented by Member States on 10 January, just before the UK left the EU. While the UK transposed many aspects of 5AMLD, elements in relation to trusts and the TRS were subject to further consultation, and the final regulations, known as The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, were laid before Parliament on 15 September and will take effect on 6 October.
Importantly, these regulations amend certain provisions within 4AMLD, such as extending the information which trustees are required to collate, to encompass information on country of residence and nationality of beneficial owners. Trustees of overseas trusts with certain UK interests will also now be required to comply with the regulations in situations where they acquire UK real estate and where they engage UK service providers, yet only in situations where such trusts have at least one UK-resident trustee. More significantly, 5AMLD expands the TRS net from previously only catching “taxable” trusts to now requiring trustees of all relevant trusts to register on the TRS, unless they fall within a specific exclusion.
Additionally, the final regulations also contain an extensive schedule over the types of trust, which will be excluded. This includes, but is not limited to:
- Trusts that arise as a result of statutory requirements (e.g. on intestacy)
- Trusts imposed by court orders
- Charitable trusts
- Trusts meeting certain legislative requirements (i.e. those holding property for vulnerable beneficiaries or bereaved minors) and
- Trusts holding assets of a registered pension schemes.
Additionally, trusts used to hold pure life or retirement policies, including group policies (but only those paying out on death, critical illness or disablement) are also included, as well as those existing trusts holding assets valued at less than £100, which were created prior to the date the regulations come into force, unless or until further assets are added (“pilot trusts”). Certain trusts used as part of the financial market’s infrastructure, capital markets, professional services or those that are incidental to commercial transactions may also be included, as will several other types.
Importantly, although some commercial nominee arrangements (such as where a stockbroker holds shares for a client) appear to be exempt, other bare trusts (such as real estate held under a bare trust arrangement), are not.
When must trustees comply?
Existing trusts that do not fall within an exclusion must either register now on the TRS under 5AMLD, or update their existing 4AMLD register with the further information required by 5AMLD, by 10 March 2022. Any trusts created on or after 6 October 2020, which are within the scope of 5AMLD, must also now register within 30 days of creation, or by 10 March 2022, whichever is later. This will include any newly created pilot trusts, but not those which were in existence already at 6 October 2020.
Importantly, an excluded trust that becomes taxable in the future, will also have to register within 30 days of becoming taxable, and any future changes to the beneficial owners should subsequently be reported on the TRS within 30 days.
Remember 4AMLD
Crucially, 5AMLD does not replace 4AMLD. It merely modifies elements of the existing regulations and the general provisions of 4AMLD still apply. Therefore, trustees should be careful not to overlook their obligations to hold trust records under regulation 44 of 4AMLD, even where they are not yet required to register the trust on the TRS under 4AMLD, or as an excluded trust under 5AMLD.
Trustees must also ensure that where a trust that is registered under the provisions of 5AMLD with certain reduced information on the beneficial owners becomes a “taxable relevant trust”, the information required to be held on the TRS correspondingly increases in scope to include further information on the beneficial owners at that time. Furthermore, trustees must also remember that there is only a 30-day window to update the information from the point it becomes taxable.
What does this mean in practice?
On the creation of the trust, practitioners will need to be conscious of the regulatory obligations that trustees will immediately be subject to. Therefore, when drafting, it would be prudent to advise trustees on the requirements, and to collect all the information needed under both 4AMLD and 5AMLD, as there will only be 30 days to register the trust on the TRS once it is established.
Given HMRC’s push towards digitalisation, every trust registering on the TRS will also need a separate government gateway account, which will require a digital handshake if the trustees wish to appoint an agent to handle this. Consequently, these requirements will make it increasingly difficult for digitally excluded people to meet their obligations.
Importantly, when the TRS was first introduced, it was not possible to update any information initially provided when the trust was first registered. Even where trustees subsequently informed HMRC over changes to lead trustees, no changes were made to the information held on the TRS. However, trustees can now make some changes online (such as changes to the trustees, beneficiaries and the settlor), but this requires trustees to pass a fact check over the original TRS submission before they can claim the TRS record. Furthermore, any errors in the original submission also need to be repeated when claiming the trust, before corrections can then be made.
To better allow trustees to meet their obligations, HMRC will shortly be switching to a new system, although this does not yet allow for further information required under 5AMLD to be appended to existing TRS records, and there will initially be no facility to create 5AMLD only records where trusts are not yet taxable. While the functionality to do so is likely to be made available in early 2021, this will give trustees a limited window to register existing trusts before the 10 March 2022 deadline.
Penalties
Trustees who fail to register or update details within the time limit will firstly be sent a nudge letter setting out their responsibilities. Subsequent offences of failure to update details within the time limit would attract a fixed penalty of £100 per offence, and trustees found to have deliberately failed to register may be subject to an immediate fine, rather than a notification.
What is HMRC going to do with all this information?
Presently, the trust register is accessible to HMRC and other law enforcement agencies. However, under 5AMLD, anyone who can demonstrate a ‘legitimate interest’ could now have access to personal details of a trust’s beneficial owners. Whilst this is clearly a worrying prospect, importantly, there are some safeguards. Firstly, a "legitimate interest" requires there to be some nexus to money laundering, so those looking to engage in a fishing exercise should not be able to gain access. HMRC can also refuse to provide access where there is a disproportionate risk of exposing the beneficial owner to fraud, blackmail, kidnapping, extortion, harassment, violence or intimidation; or if the beneficial owner is under 18 or lacks mental capacity. Fortunately, these safeguards suggest that some level of privacy will at least be maintained at present.
Importantly, EU Directives have shown an intention to connect countries’ national trust databases through a central register. However, given that each member state can choose whether or not to make their own register public, this has potential privacy implications for the future, and could lead to member states effectively having the power to publicise trust registers from across the EU.
Protecting privacy
Protecting clients’ privacy should also be driving changes for practitioners, such as by anonymising the name of a trust in order to shelter the beneficial owners of the trust if the trust register were to become public in some form. In fact, due to the publicly accessible and searchable register of legal entity identifiers required by trusts to be able to trade on financial markets, which were introduced in 2018 as part of the Markets in Financial Instruments Directive (MiFID II) regulations, such practices are already taking place.
Furthermore, when drafting trust deeds and letters of wishes, avoiding naming individuals may also now be preferable. This is because it assists trustees in not having to collect considerable data up front about beneficiaries, who may not yet know of the existence of the trust but who would otherwise be tipped off about it when they receive a request for information. However, these considerations must be balanced with future problems trustees may face when trying to exercise their powers, and discretions if they do not have clear and unambiguous guidance about who should benefit from the trust and how.
Are trusts still useful?
The compliance obligations on trustees are getting more complex and onerous. The push for greater transparency requires trustees to disclose ever greater amounts of information to HMRC and other authorities, whilst GDPR places further obligations on trustees to ensure individuals know what is happening to their data. Therefore, significant amounts of time are required to be spent by trustees to make sure they are compliant and up to date with ever evolving regulations, and failure to comply can lead to penalties and criminal sanctions. This inevitably all comes at a price, and therefore many trustees will be considering whether the benefits that their trusts provide outweigh the burdens.
In light of this, it is important trustees keep in mind the reasons why a trust was set up in the first place. Control and asset protection are often driving factors for establishing trusts, as they allow settlors to give away assets so that others can benefit and enjoy them, whilst retaining control, which can be particularly useful where beneficiaries are young or financially inexperienced. Additionally, trusts can also provide tax benefits and, if drafted appropriately, can be a useful vehicle for protecting assets on divorce and relationship breakdowns.
The increasing obligations on trusts will by no means be the final nail in the coffin for all trusts. Granted, the new obligations may mean that keeping a number of trusts, particularly smaller ones, running is simply not viable. However, the additional time and cost may still be a price worth paying for many others, and all the necessary factors must be accounted for.
First published by Trusts & Estates Law and Tax Journal. Reproduced with permission.
Duncan McGowan