Do you have clients who have created Trusts? Then please read on.
As you may already be aware, on the 22nd June 2017, the UK (as an EU member state) was required to implement the EU’s fourth money laundering directive. This was originally accomplished by the publication of the Money-Laundering, Terrorist Financing and Transfer Funds Regulations.
It became a legal requirement for trusts to register the details of settlor, trustees and the beneficiaries. At the time, HMRC (Her Majestys Revenue & Customs) estimated that 170,000 trusts would need to register. Failure to register has penalties of a fine and up to 2 years in prison.
Even though the regulations were brought in by an EU directive, they will remain within UK law post-Brexit.
In July 2018, the EU’s fifth money laundering directive came into force. The effect of this means that the UK must put in place the new rules for trusts by March 2020.
The latest directive will expand the scope of the existing register. This is regardless of whether the trust has incurred any UK tax liabilities. So, for many of the trusts that have been dormant, they will come into scope. For example, trusts that hold land and property or, investments such as life insurance policies.
Express trusts are generally defined as trusts that a settlor creates. As opposed to in other ways, such as through court order or through statute. This description is likely to include:
- discretionary trusts
- interest in possession trusts
- many types of bare trusts
- charitable trusts and;
- employee ownership trusts.
When the trust register came into existence in 2017, express trusts that incurred a UK tax consequence were required to register with the Trust Registration Service. With the implementation of the new legislation, it now means that ALL express trusts must register. This is irrespective of if they have a UK tax liability or not.
John Stride, co-chair of the ATT’s (The Association of Taxation Technicians) steering group, said:
“It is important that we have robust measures in place internationally to prevent the financial system being used for money laundering and financing of terrorist groups. But it is also important that these measures are proportionate and those who, while willing, may struggle to comply, are helped through the process with clear guidance and a collaborative approach from the authorities.
“While it is impossible to know how many more trusts will need to register under the new rules, the sheer scale of this task must not be underestimated. Many trusts which have been effectively dormant, often for many years, will be brought within scope, including trusts that hold land and property or, very commonly, investments such as life insurance policies. Given the low level of understanding of trusts by the general public, we think that it will be extremely difficult to ensure that all the trusts which will be caught by the new rules are identified and registered.
“We are calling on the Government to provide clear guidance, together with understandable examples, on what arrangements are in and out of scope of the rules to ensure that trustees can understand and comply with their obligations.
“Trustees who inadvertently breach the regulations by failing to register run the risk of both civil and criminal sanctions. Even the smallest trusts must comply because there are no carve-outs, exemptions or de minimis thresholds in the rules. Many trusts do not have any liquid cash assets, nor assets that could be easily sold to raise funds, which leaves trustees who need to seek professional advice in the difficult position of having to meet the costs personally. It is vital that trustees can establish their obligations from clearly drafted guidance.
“We urge the Government to apply the penalty regime in a proportionate and reasonable manner for any trust that fails to register. It is quite possible that trustees who are not seeking to hide anything could be in breach of the regulations entirely unintentionally if they are unaware of the rules. The objective of any penalty regime should be to educate and encourage trustees to comply and not to levy penalties.”
The deadline for registering a trust is also changing. Before, rules required that the deadline was 31 January of the tax year following the taxable event. As the expanded rule covers trusts with no tax consequence, the government has said that the link between the deadline for registration and the tax year no longer applies. Instead, it has recommended that all unregistered trusts already in existence on 10 March 2020 will need to register by 31 March 2021.
New trusts created on or after April 2020, must register within 30 days of their creation. This 30-day deadline will allow for any amendments needed for the trust register data e.g. a change of trustee.