Matthew Biles Partner, Head of Department, Private Wealth
New sweeping blanket requirement to register nearly all UK connected trusts under Fifth Anti-Money Laundering Directive
Whilst the Fifth EU Anti-Money Laundering Directive (5MLD) came into force on 6 October 2020 with little fanfare, the impact it will have on trusts with a UK connection could well be dramatic.
In essence, the 5MLD implements a number of strict anti-money laundering requirements; a number of which have now been extended to nearly all trusts including non-taxpaying trusts, which to date were exempted from such reporting.
This article seeks to give a brief overview of the implications for such trusts for the trustees, who will be responsible for such filings, to consider:
Registration of UK trusts with HMRC’s Trust Registration Service (TRS)
At present, only trusts which have to pay tax in the UK must register with the TRS. However, 5MLD significantly extends the scope of the trusts which must register with the TRS.
Trusts that are excluded from the requirement to register
The legislation lists the types of trusts which are excluded from registration. Among the exclusions are, for example:
- Trusts created by operation of a deceased’s will which are wound-up within two years of the death;
- Statutory trusts (most notably trusts arising on intestacy, where a deceased has died without a Will in place);
- Co-ownership trusts; for example where bank accounts are owned jointly or a property is owned as tenants-in-common;
- Personal injury trusts;
- Trusts imposed by a court order;
- Trusts for charitable purposes;
- Certain trusts arising by Will for the benefit of minor beneficiaries; and
- Trusts consisting solely of an insurance policy or a registered pension scheme.
As will be apparent from the above limited exemptions, soon there will be an obligation for nearly all trusts to be registered with HMRC.
Life policy trusts
The exemption from registration for trusts holding life policies where payment is not to be made until the death or the terminal illness of the insured, potentially even where the policy may be surrendered (if and until it has been surrendered), is particularly helpful. This should reduce the compliance burden for numerous trusts that might otherwise fall within scope, especially in light of the fact nearly all such policies are settled into a trust of some description, and where the risk of involvement in money laundering or terrorist financing is likely to be extremely low.
Trusts now requiring registration
The scope of trusts which require registration will therefore soon be greatly increased. Those trusts requiring registration will include many discretionary trusts, life interest trusts, bare trusts/nominee arrangements and many non-UK resident trusts which hold UK assets.
In the case of bare trusts, the broadening of the rules to encompass these is likely to impose a significant reporting burden on numerous existing low cost estate planning arrangements, including nominee trusts by which assets are held for minor children and disabled persons. It had been hoped that these types of trust would be exempted in the same manner as trusts holding life policies, but no such exemption has been given. The trustees of such trusts may be unaware of the scope of these rules, especially where these were established some time ago and the trustees are solely family members. Dealing with the formalities arising from the TRS may lead some trustees to consider whether these arrangements should now be reviewed and alternatives explored.
Non-UK resident trusts
The broadening of the requirement to register applies also to non-UK trusts as to UK trusts. As such, any non-UK resident trust that acquires (or has acquired) certain interests in UK land or property (a freehold interest or a lease of more than seven years) after 6 October 2020, and that falls outside of the above exemptions, will be required to report and lack of knowledge of this requirement will not protect the relevant trustee(s) from the levying of financial penalties. This requirement could perhaps have the most unanticipated results by effectively requiring all bare trust and nominee arrangements over such land to be declared and the relevant parties identified to HMRC.
Non-UK trusts with a UK resident trustee may also be required to report if the trustees enter into certain UK based business relationships, such as appointing UK-based advisers (see below).
Furthermore the privacy and data sharing rules that apply to information filed by such non-UK trusts (UK express trusts being required to register already under the broadened rules) will depend on whether at least one of the trustees is UK resident, with trusts without a UK resident trustee enjoying greater privacy.
It had originally been proposed that trustees of trusts that had instructed UK-based advisers, and where there was no other connection to the UK, would be required to register such trusts on the TRS. This had been an area of concern to trustees that appoint UK-based advisers, whether these are lawyers, accountants, bankers, investment managers or any another type of adviser.
Last year, the UK Government ran a consultation on the proposed scope of the new rules. One positive outcome of the consultation was that HMRC confirmed that trusts that do not have a UK resident trustee will not be required to register on the TRS merely as a consequence of appointing UK-based advisers. This should give substantial comfort to non-UK based trustees that are in the habit of instructing advisers based in the UK.
Failure to register trusts and failure to keep up to date the information filed on the TRS may see trustees in breach of their obligations under the MLR 2017, and subject to penalties. Professional trustees may also face reputational damage for failure to comply.
Trustees that are concerned that trusts that they act on may fall within the scope of the new TRS rules would be recommended to take advice about how the rules may apply to them.
The TRS is not yet able to take registrations for non-taxpaying trusts (whether UK resident or non-UK resident). HMRC inform us that the relevant systems are set to be in place during the ‘summer of 2021’. Thereafter, there will be a 12-month window in which to register existing trusts. Assuming HMRC has the relevant systems in place existing trusts must therefore be registered by the ‘summer of 2022’.
Broadly, new trusts established during 2022 and onwards will need to be registered within 30 days of their establishment. In addition, trustees, or their agents, will be required to provide a declaration annually as to the accuracy of a trust’s TRS entry or provide any details of the amendments to the TRS entry.
The consequence of the need to register with the TRS is that trustees’ personal details including names, addresses, dates of birth, and contact details will be held by HMRC. The same information will often need to be provided for named beneficiaries and the settlor of the trust. The information to be provided by trustees of trusts that are subject to UK tax is more comprehensive than the information to be supplied in other circumstances (i.e. by the trustees of trusts that have fallen within the scope of the TRS as a consequence of the extension of the rules).
Thereafter, any person can file a written request to HMRC to be supplied with any trust’s TRS entry. This written request must be made by someone with a ‘legitimate interest’. In addition law enforcement agencies and those who enter into a business relationship with a trust will have access to that trust’s TRS entry.
Someone with a ‘legitimate interest’ is broadly defined as someone who legitimately suspects criminal activity. It remains to be seen how requests will be handled, and what safeguards may be put in place by HMRC to prevent or turn away unfounded requests. It is understood that the protection of information on minors and vulnerable persons will be treated with particular importance.
It is anticipated that the above new requirements will cause considerable challenges to trustees to compile and file all relevant information with HMRC.
If you are impacted by any of the above issues or require advice on filing for the TRS, please do not hesitate to contact Matthew Biles, Robert Payne or Edward Knox from our Private Wealth team, who will be more than happy to help.