As winter rapidly approaches and we look towards 2020, it is a good time to take a breath and reflect on the considerable changes to the administration and taxation of trusts in recent years and also to look ahead to what you need to do.
Drawing general themes from these changes, we have seen a global push for transparency through disclosure regimes and public registers and, in the UK at least, widening tax exposure for non-UK residents and domiciliaries. Tax avoidance also continues to be high on the agenda of national governments (armed with ever more data) and international bodies.
Looking (slightly) back, the transparency push in the UK has seen the introduction in 2016 of the Persons of Significant Control (PSC) register which obliges UK companies to disclose wide categories of persons exercising control (which can include trustees or persons otherwise controlling or influencing a trust). This information is now available to the general public, including investigative journalists, at the click of a button.
The next public register on the horizon appears to be a beneficial register for overseas entity owners of UK real estate. The UK government has proposed for the register to be in place in 2021 (stay tuned for our 2020 guide!).
Aside from transparency through public registers, more information than ever must now be disclosed to tax authorities through FATCA and the Common Reporting Standard (CRS). Trustees have also grappled with the UK’s non-public trusts register, which requires trusts with a UK tax liability to register and disclose information about their beneficiaries to HMRC. The Fifth Anti-Money Laundering Directive (5MLD), passed in 2018, requires this register to be extended to even more trusts (including to all EU express trusts) in 2020.
On the tax side, significant UK changes introduced in April 2017 and April 2019 mean that overseas structures or individuals holding UK land directly or indirectly are potentially exposed to inheritance tax and tax on gains on disposals. 2017-2018 also saw a general overhaul to the taxation of offshore trusts in the UK with ensuing administrative and strategic implications for trustees.
Adding all this change together, trustees can be forgiven for thinking that the last few years has been something of a whirlwind of administrative and tax changes.
That said, 2019 in the UK has mainly been about implementing proposals in this area rather than the announcement of new ones, but there are still plenty of pitfalls and also opportunities for trustees to consider in 2020, as well as the need to take stock of all this year’s changes.
Action points in 2020
Planning for corporation tax on rental profits (affecting non-resident companies with UK rental profits)
Deadline: 5 April 2020
Trustees of trusts with underlying companies holding rental properties should note that from April 2020, non-UK resident companies will be subject to UK corporation tax (rather than income tax) on their rental profits from UK property. By April 2020 the rate of corporation tax is expected to be 17%, in contrast to the current income tax rate of 20%.
Non-resident trustees of discretionary trusts will continue to be subject to income tax on direct receipt of rental profits at 45%.
Planning Point: The government’s changes have tried to level the tax / compliance playing field between UK and non UK companies holding UK residential property. Trustees should consider with their advisers whether existing non-UK structures still deliver the intended benefits and may wish to look at alternative options.
Action point: Change to the Trusts register
Deadline: 10 March 2020 (maybe)
The Fourth Anti-Money Laundering Directive led to the introduction of the UK trusts register in 2017 which obliges all trusts subject to UK tax to keep a register of beneficial owners and provide this information to HMRC. Once the trust has been registered, the trustees must update the trust register in any subsequent tax year by 31 January following the end of the tax year.
5MLD entered into force at EU-level on 10 July 2018. This expands the scope of this register by requiring trustees or agents of all UK and some non-EU resident express trusts to register those trusts, whether or not the trust has exposure to UK tax. The UK is required to implement these changes by 10 January 2020 and has a further two months to implement the trust registration requirements (political events notwithstanding). The wide scope of this measure and the uncertainty on which trusts will actually be affected is a concern for trustees so close to the deadline.
Many more trusts will need to be registered in the UK under 5MLD, as it will now encompass:
- All UK resident express trusts;
- Non-EU express trusts with UK assets; and
- Non-EU resident trusts with business relationships receiving services such as banking, accountancy or legal advice in the UK on an ongoing basis.
The government proposes that the third category will mean any business, professional or commercial relationship that is connected with the professional activities and which is expected, at the time when the contact is established, to have “an element of duration”. The consultation has proposed “an element of duration” to encompass working interactions of 12 months or more. We await confirmation of how this will be put into practice but it seems likely to catch many professional relationships with UK-based advisers.
The trusts register is not currently publicly available but 5MLD provides that information can be disclosed to persons who show a “legitimate interest”. There is no definition of “legitimate interest” in the Directive and the government consulted earlier in the year on how this would be implemented.
Planning Point: Trustees should review their assets, business relationships and tax position in the UK to see if they will be required to register under 5MLD. If trustees do need to register the trust or refresh details, they should make sure they have the up-to-date relevant information on beneficiaries and other disclosable persons to meet their legal requirements.
Given the push towards transparency and the sharing of information to persons with a “legitimate interest”, trustees should have conversations with beneficiaries and other persons whose details will be shared about the register and use of their information by public authorities.
Action point: Beneficial ownership register of land
Deadline: Expected to be in 2021 but review proposals with advisers and beneficiaries in advance
The UK government published a Briefing paper on 7 August 2019 entitled “Registers of beneficial ownership” stating that it plans to launch a public beneficial ownership register for foreign companies owning UK land in 2021. The Land Registry (England and Wales) shows the direct legal owner of properties but not the beneficial owner (when the two differ).
Planning Point: Foreign corporate directors will need to consider the detail of the proposals when they come out to identify the persons they will be required to disclose publicly.
Planning for a settlor who is becoming deemed domiciled
Deadline: 5 April in the 15th year of UK residence
Non-UK domiciled individuals now become deemed domiciled for all UK tax purposes after their 15th tax year of residence. This means that they can no longer claim the remittance basis of taxation and will be subject to UK tax on their worldwide income and gains as they arise. Their UK inheritance tax exposure also extends from UK assets only to worldwide assets.
Trusts however remain valuable tax planning tools. Under the old rules, a settlor beneficiary would have been immediately subject to UK tax on trust income and gains if the remittance basis was not available. However, new rules were introduced from 6 April 2018 providing very favourable tax protections so that non-UK domiciled settlors will only pay tax on trust (non-UK) income and gains (UK or non-UK) to the extent that they receive distributions and benefits from the trust even after they have become deemed domiciled. Trusts can therefore allow for tax-free roll up on income and gains unless and until funds need to be distributed.
Action may be needed to take advantage of the protections and ensure they are maximised. Any action will most likely need to be implemented in the tax year before the settlor becomes deemed domiciled. One example of the planning involves working with investment advisers to determine if the investment strategy continues to be fit for the purpose – see below an example in relation to gains on "non-reporting funds". It is advisable to check that the settlor or potential settlor has not acquired a UK domicile of choice before implementing any planning. If they have, there would be inheritance tax charges on creating a trust and ongoing and the above-mentioned protections would not apply.
NB: the inheritance tax rules have not changed under the new rules and any non-UK assets held in trust and settled before the settlor becomes deemed domiciled will remain excluded property for inheritance tax.
Action Point: review tainting where a settlor is deemed domiciled
Deadline: 5th April each tax year
The trust protections introduced in April 2017 preventing the deemed domiciled settlor from being subject to income tax and capital gains tax on trust income and gains will only be available if the trust is not “tainted”. Tainting will arise if for example a deemed domiciled settlor adds funds to the trust or certain loans are outstanding that are not on commercial terms. Trustees should keep this under review to ensure there is no inadvertent tainting – in some cases the position can be rectified provided it is done before the end of the tax year.
Please see for our briefing note dealing with inter-trust loans in particular, a common area where tainting may occur inadvertently.
Action Point: review gains on non-reporting funds where a settlor is deemed domiciled or not claiming remittance basis
Deadline: 5 April before settlor becomes deemed domiciled or a year for which he will not claim the remittance basis
The UK’s April 2017 non-dom / offshore trust changes provided that that long-term UK residents (resident for 15 or more out of 20 tax years) would be taxed on the arising basis. However, special trust protections were promised so they would not be taxed to income or gains as they arise on an offshore trust established when they were non-domiciled.
Nevertheless, when the protections were introduced into law, gains realised on non-reporting funds held within otherwise protected trusts were not brought within the protections. This potentially exposes a deemed domiciled (or who does not claim the remittance basis) settlor of a “protected trust” to income tax on such gains as they arise. This is a potentially serious issue for trusts with deemed domiciled settlors and advice should be taken on how to manage the position.
Points to keep under annual/ongoing review
Action point: Extended time limits for offshore transfers
Deadline: Ongoing - trustees may need to review historical files
From April 2019 the UK extended its assessment time limits of non-deliberate under-declaration of income tax, capital gains tax and inheritance tax liabilities from offshore matters from the current four or six-year periods to 12 years. The existing 20-year time limit for deliberate loss of tax remains.
Additionally, where there has been a failure to correct the UK tax position for offshore non-compliance for periods up to 5 April 2016 without a reasonable excuse, penalties of 100-300% of the tax can apply. HMRC also has the power to impose a further penalty of up to 10% of the value of assets connected to the failure and publicly name (and shame) the person(s) involved.
Planning Point: It is important that trustees, with the help of advisers, address any areas of UK tax concern in a timely manner. While the offshore penalty regime is now stricter across the board, the penalties for unprompted disclosures are generally much less punitive than if they are prompted by HMRC.
Capital Gains: 2019 changes
Trustees should be aware of how the April 2019 changes to capital gains may affect the taxation of their structures. Please see our CGT changes briefing dated 18 July.
The changes now mean that direct disposals of commercial property and of shares in UK “property-rich companies” (above a 25% ownership threshold) are now exposed to non-resident CGT (for trustees) or corporation tax (for companies). Broadly, a company is UK property rich if 75% or more of the gross asset value of the company (including the value of any subsidiaries) is derived from UK land.
Rebasing is available to 5 April 2019 on indirect disposals and direct commercial property disposals caught under these new rules. Direct residential property disposals are now all rebased to 5 April 2015. Any general gains since acquisition should also be logged by the trustees as, while the new rules take priority, any gains from earlier periods may be charged to UK resident beneficiaries who receive benefits under matching rules or attributed to a UK domiciled settlor.
Planning Point: Trustees should review the UK tax position of their structures to understand the tax and administrative requirements before moving ahead with any direct or indirect disposal of UK land.
Trustee residence and management and control
Professional trustees will be very familiar with the UK rules for trust residence. Individual trustees must be non-UK resident under the UK's statutory residence test.
Corporate trustees must ensure that the trust company is not centrally-managed and controlled in the UK. Particular issues can arise with private trust companies where, for example, the settlor or other UK resident is a director or otherwise influences decisions. Central management and control of non-UK companies is an area increasingly under scrutiny by HMRC and it is a good idea to review arrangements and ensure a protocol is in place for decision making.
Similar care should be taken with underlying entities.
Tax residence of beneficiaries and settlor
The tax residence of beneficiaries and settlors should be checked every year as it can change. UK tax residence is determined on a year-by-year basis and the year is from 6 April in one year to 5 April in the next. Many other jurisdictions work on a calendar year. This feeds into the reporting for FATCA and CRS discussed below.
Beneficiaries in jurisdictions such as the US, France and Israel should be reviewed particularly carefully given the potentially punitive taxes and reporting requirements possible in these jurisdictions.
If the settlor is a “formerly domiciled resident” (broadly a non-domiciliary with a domicile of origin in the UK and born there) the trust property cannot be excluded property for the purposes of inheritance tax from his second year of UK residence. It is particularly important for a trustee to be aware when such an individual becomes UK resident. It potentially means tax payable by the trust (for example if the settlor is UK resident over a 10 year charge date or when assets are distributed from the trust). The settlor himself may be liable to tax on the trust’s income and gains but with a right under UK law to reclaim the tax from the trust.
Maintain income and capital gains logs
A trust with UK resident beneficiaries needs to keep track of income and gains arising at both trust and underlying company level so that the relevant information can be provided to UK resident beneficiaries who receive benefits or distributions. The logs should work on a UK tax year basis, ie from 6 April in one year to 5 April in the next.
Where the trust assets comprise investment portfolios, it may be enough to check with the trust's accountant (or the beneficiaries' accountants as applicable) that the annual statements are sufficient to pull the necessary income and gains information together in the event of distributions, rather than maintaining detailed logs on an annual basis.
Income/gains stripping out
Deadline: 5 April
It can be advantageous for income and/or gains to be paid out from trusts and underlying companies before the end of the UK tax year. This is sometimes known as stripping out.
Trustees who have not yet taken advice on this point should do so now to ensure that they are up to date as regards the new rules and whether stripping out is efficient from a UK tax perspective. For example, up to 6 April 2017. It was it it was possible to strip out gains to non-UK residents so that these gains were not taxed when UK residents received distributions. This is no longer possible under the new rules and there are other new anti-avoidance provisions that may also need to be considered.
Allocation of trust expenses
It is important to consider the allocation of trust expenses to income or capital for UK tax purposes. The decision will be informed partly by the terms of the trust (eg whether the trustee has discretion to allocate expenses as it wishes) and the circumstances of the beneficiaries. For example, if the beneficiaries are UK resident, it can be useful to use trust income to pay expenses so that the income is not available to be taxed on the beneficiaries by reference to distributions.
Inheritance Tax 10 yearly and exit charges
Deadline: 6 months after the end of the month in which the event occurs
Shares in non-UK companies which own UK residential property and the benefit of loans used to acquire UK residential property are now deemed to be UK assets for inheritance tax purposes and other UK assets. It is important that trustees review their structures to assess the level of inheritance tax exposure and any relevant deadlines.
Settlor death – gift with reservation of benefit
Deadline: 12 months from the end of the month in which the death occurs
If the settlor dies, the trustee will need to consider whether this affects the trust. If the settlor was a beneficiary and the trust held UK assets at his or her death (or the settlor was UK domiciled or deemed domiciled when the assets were settled), there will be an inheritance tax charge under the gift with reservation of benefit rules which may be payable by the trustee. This can give rise to significant inheritance tax charges and should be reviewed immediately if this point is identified. If a reservation of benefit arises and steps are taken to exclude the settlor from benefitting, there will be a seven-year run-off period until the assets in question cease to form part of the settlor’s estate.
Reporting and accounting
UK trust register: requirement to register
Deadline: 5 October after the end of the tax year for new trusts 31 January after the end of the tax year for existing trusts
The current trigger point for registration is if the trustee for the first time in a tax year has a direct liability to any of UK income tax, capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax. As noted above, more trusts may be brought within the scope of these rules in 2020 under 5MLD.
UK trust register: updating HMRC
Deadline: 31 January after the end of the tax year
If the trustee becomes aware that any of the information provided to HMRC has changed, it needs to notify HMRC of these changes.
CRS and FATCA
Deadline: generally 31 May
Trustees may be required (directly or indirectly) to report the identity of “beneficial owners” and other details about the trust to HMRC under the common reporting standard regime and FATCA.
Filing UK tax returns
Income tax: 31 January following the end of the tax year
Returns are required for disposals of UK land (including commercial property) and shares in property-rich companies.
NRCGT: generally 30 days after the disposal of the property.
A trust needs to file a UK tax return if it receives UK source income. There are exceptions if the trust has no UK resident beneficiaries.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2019