A vast number of everyday trusts will need to be registered on the Trust Registration Service (TRS) under changes currently subject to consultation.
When the 5th Anti-Money Laundering Directive (5MLD) came into effect in January 2020, it didn’t extend to trusts, but a consultation on TRS & draft regulations was opened. The draft regulations are likely to be amended and supplemented by draft guidance in spring 2020, with the extension of TRS to 5MLD due later in 2020, or possibly in early 2021. Meanwhile, some professionals are wondering what to say to clients.
Professional bodies, such as STEP, The Law Society and the Chartered Institute of Taxation, have been working hard to consider the draft regulations (issued on 24 January 2020) with HMRC and how they could be improved. Having participated in two such meetings, on behalf of CIOT, I can see a little more clearly where they may be going on this. We’ll await the next stage of consultation, but in the meantime, I hope this helps show what’s important here and what might need doing.
Under the current 4MLD, trusts currently only need to register with the TRS where any tax is due. 5MLD proposes that all express trusts must register unless they’re within one of the exclusions – the limits of which are the key focus of attention in the consultation. HMRC have made it clear that their priority is to protect against the risk of Money Laundering (ML), to uphold the highest of standards, and therefore will only to extend the scope of exclusions if there’s a low ML risk. The risk of challenge from the EU Commission is still live for another four years, so leaving the EU doesn’t just end that oversight. Let’s consider some key relevant trusts:-
Trusts of land – joint ownership
The draft reference to ‘jointly owning a home with a partner, relation or friend’ raises lots of questions when it comes 2nd homes and rented properties. Any other trust set up to hold property, not within an exclusion, would need to be registered. In this, as with other exclusions, HMRC considers first whether a trust is within the category of a trust imposed or required by an Act or subordinate legislation. By this test, jointly owning land is an inescapable trust, so it seems a declaration of trust e.g. of shares owned as tenants in common, at the time of acquiring the property is fine, as is a such a declaration made at a later date. However, current indications are that the exclusion will not extend to any successive or discretionary interest, e.g. a life interest or right to occupy, or a Discretionary trust.
In this month’s issue of Clarity there’s another article that covers trusts providing a right to occupy, which you can read here .
Could a simple life interest of a property, with no other assets, not be excluded as a low ML risk? It seems this may be asking too much. In which case all the "dormant trusts" where a property, or a share of one, is held for one person to use now and another to benefit later, would need to be registered. By their very nature, these trusts typically don’t have any funds from which costs can be paid, and often aren’t being looked after by anyone as the admin required can be minimal (e.g. keeping up insurance including the names of trustees). At some point, solicitors will need to consider if they should trawl through the deeds in their strong rooms to find any such trusts, and write to the trustees about their need to register. For now, this isn’t needed, but it would be sensible for good records of trusts of this type to be kept and the issue of registration to be raised with the trustees as in my 3 point plan below.
Bare trusts can’t all be excluded, as there’s too great a ML risk. Personal injury trusts are excluded, including bare trusts, on the assumption that having an accident isn’t a good way to money launder. Could all bare trusts for minors be excluded? It would seem a sensible and proportionate exclusion.
Any trust set up by intestacy would be excluded, as a trust arising by legislation, rather than a conscious act, but surely public policy shouldn’t discourage making a will. It can’t be right to give some trusts for minors in Wills extra compliance burdens, compared with not making a Will.
Vulnerable beneficiary trusts are being considered. Disabled persons trusts would be fine, and bereaved minors trusts (set up by Will to the age of 18) would also be ok, but possibly not 18-25 Trusts or bare trusts. It’s currently likely that any Immediate Post Death Interest (IPDI) or Relevant Property Trust set up by a Will would need to register, but an IPDI arising by intestacy would not. There’s still some work to be done on the limits here, and we await the draft Guidance and amended draft regulations later this spring.
Life policy trusts: the draft regulations refer to policies that pay out only in the event of “death, terminal illness or permanent disablement”. This potentially catches (i.e. the exclusion doesn’t cover) any trust that has any surrender value or can be cashed in at a time prior to death etc.; and also anything that has e.g. critical illness cover, such as a split trust dealing with both the critical illness and death elements of a policy. Financial planners arranging life cover written in trust may need to take great care about whether the cover is excluded or not.
Pilot trusts for pension death benefits: While trusts in pensions schemes themselves should be excluded, on the basis that they are regulated separately in any event, this does not extend to any pilot trust set up to receive a pension death benefit. While Spousal by-pass trusts are much less utilised than before the 2015/16 pensions changes, many continue in place and they still have value for some circumstances. Such trusts will need to be registered.
Meanwhile, what is to be done? We now know a lot of additional trusts will need to register, and arguably have an obligation to trustees to raise this.
3 point action plan when
setting up a will trust, or trust of property, life policy or pension death benefits
doing any work on such a trust, e.g. selling and buying a new property, or dealing with a change of trustees
when reviewing any life policy or pension trust (e.g. on an annual financial planning review): Keep a record of any new trust created, or under review: the trustees, trust documents and assets settled, with a view to following up with the trustees about registration when the scope is clear. This applies to lifetime trusts, and to will trusts on death, but not to wills that include trusts which will not take effect until the death of the testator. Advise the Trustees that it is likely that the trust may need to register on the Trust Register within 2 years: the current time limit for trusts in existence before the legislation takes effect is 2 years from that date. Consider whether any funds might be retained by the Trustees, or held on account of future costs, for this process. We are considering how we can support our professional referrers, once the form of the new regulations is clear, with this process. We have registered many trusts already, under 4 MLD, but appreciate it is a concern for many setting up trusts.
Major concerns have been expressed by professional bodies of the other risk of HMRC shooting themselves in the foot, by making trusts so compliance heavy that offshore trusts choose to seek advice and investment management from other jurisdictions like Malta, Cyprus and places outside the EU.
Losing business from the UK, damaging the UK economy, with the end result of lower standards of compliance elsewhere, is a serious risk some have seen starting to take effect. Any readers involved in this work would be well advised to consult their professional bodies to support any initiatives. MLD Standards are best upheld by advising on and managing trusts (and their investments) well in the UK.
Published: February 2020
A monthly briefing from Irwin Mitchell
February 2020
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