On 26 June 2017, the UK Government introduced a beneficial ownership register for trusts for the first time, in response to its need to comply with the EU’s 4th Anti-Money Laundering Directive. Which trusts will be affected and what will trustees have to do?
The changes, contained in UK Regulations, affect both UK and non-UK trusts. A UK trust is defined as either one where all the trustees are resident in the UK or where there is at least one UK resident trustee and the settlor was resident and domiciled in the UK either when the trust was set up or when funds are added to it. Residency means tax resident for UK tax purposes.
A non-UK trust, defined as any trust which is not a UK trust, will have to comply with the Regulations if it receives income from a source in the UK or has assets in the UK on which it is liable to pay certain UK taxes – Income Tax, Capital Gains Tax, Inheritance Tax, SDLT or Scottish LBTT, and SDRT.
The trustees of affected trusts have three core obligations under the new Regulations:
- Keep accurate and up-to-date records of all beneficial owners and potential beneficiaries referred to ‘in a document from the settlor relating to the trust such as a letter of wishes’. Paid professional trustees must retain these records for five years after the date on which the final distribution is made from the trust.
- When dealing with the likes of financial institutions, lawyers, accountants and estate agents, trustees must identify themselves as trustees and provide beneficial ownership information to them, updating that information during the course of the relationship if necessary.
- Trustees who are liable for any of the UK taxes mentioned above are also obliged to provide information about the beneficial owners of the trust and potential beneficiaries to HMRC and, on request, to other defined law enforcement agencies, which include the Financial Conduct Authority in addition to the Police.
A ‘beneficial owner’ of a trust includes the settlor, trustees, beneficiaries (or where not all of the individuals benefitting from the trust have been determined, the class of persons in whose main interest the trust is set up or operates), and any individual who has ‘control’ over the trust, which is defined in the Regulations and would include a protector or someone with the power to appoint or remove trustees or beneficiaries.
HMRC is required to maintain a register of beneficial owners and potential beneficiaries of taxable trusts. It seems the register will not be made public.
For existing trusts which are taxable, information must be provided to HMRC on or before 31 January 2018. Trusts set up after this date would have until 31 January following the tax year in which they are first liable to pay UK taxes to report beneficial ownership information to HMRC. So a trust set up on 1 November 2018 which will be liable to pay UK tax will have until 31 January 2020 to provide beneficial ownership information to HMRC.
It is not entirely clear from the Regulations whether trustees only need to report to HMRC in respect of a tax year in which they were liable to pay UK taxes or whether, once a report for a tax year has had to be made, the trustees are obliged to continue to report thereafter. In the absence of any guidance from HMRC at present, it seems that if, for example, the only asset of a trust is a property occupied by a beneficiary rent free, the trustees will not have any UK tax liability and therefore any obligation to report beneficial ownership information to HMRC, but will still have an obligation under UK law to keep beneficial ownership information and provide it when dealing with certain professionals. However in the year in which the trustees disposed of that property, triggering a liability to Capital Gains Tax, beneficial ownership information would also have to be provided to HMRC by 31 January after the end of the tax year in which the tax liability arose.
The information that the trustees will need to give to HMRC is extensive, as follows:
- name of the trust;
- date on which the trust was set up;
- a statement of account describing the trust assets, including the address of any real estate held by the trust, and identifying the value of each category of the trust assets at the date of the first report;
- the country of tax residency of the trust;
- the place of administration of the trust;
- contact details for the trustees;
- names of advisers who are paid to provide legal, financial or tax advice to the trustees in connection with the trust;
- details of the trust’s beneficial owners, including an individual beneficiary’s full name, date of birth, their role in relation to the trust and UK national insurance or tax reference number or, if none, usual residential address and, if that address is outside the UK, the individual’s passport or ID card details or equivalent form of identification. Separate requirements apply to beneficiaries who are legal entities. If the beneficial owners include a class of beneficiaries, not all of whom have been determined, it will suffice if a description of the class is given instead.
HMRC has now published a link to its new Trusts Online Service, through which new trusts can obtain a trust tax reference number (replacing the paper Form 41G) and at the same time provide their beneficial ownership information. Existing trusts with a UK tax liability also need to register with the Service to provide their beneficial ownership information. Only trustees or their advisers with a Government Gateway account can access the online link.
The legislation expressly provides that trustees cannot be made liable for making disclosures in accordance with their obligations under the Regulations but this is unlikely to provide comfort to trustees whose trusts are governed by non-UK law. Trustees will want to be clear about the extent of their regulatory obligations to be sure that they are not exposed to claims of breach of confidentiality by their beneficiaries.
Personal representatives of complex estates, meaning estates worth in excess of £2.5 million or where the tax due for the entire administration period exceeds £10,000, or if the value of assets sold in any tax year exceeds a certain threshold (£500,000 for deaths after April 2016), will also have similar reporting obligations to those of trustees.
The information needed is extensive and, for existing trusts liable to UK tax in the current tax year, the deadline to provide information to HMRC will be 31 January 2018. However the obligation on trustees to maintain written records appears to have come into force on 26 June! Trustees who need to engage financial or professional advice from now on will need to provide beneficial ownership information. Therefore trustees should be taking steps now to collate beneficial ownership information and, if the trustees are liable to UK taxes, consider obtaining valuations of trust assets to provide HMRC with the required statement of account. Trustees may also consider asking settlors to review their letters of wishes.What sanction is there likely to be for trustees who are non-compliant, particularly for non-UK trusts outside of the UK jurisdiction? Failure to comply with UK money laundering requirements is a criminal offence under the Regulations but, on a more practical level, the trustees’ UK accountants, lawyers, investment managers and letting agents are unlikely to feel able to do business with non-compliant trustees after January 2018.