In 2017 we saw a further step taken in relation to the transparency of trust arrangements with the establishment of the UK’s Trust Registration Service (TRS) in accordance with the Fourth Money Laundering Directive. The TRS was set up to obtain information about express trusts that incurred a liability to certain UK taxes including income tax, capital gains tax and inheritance tax (known as taxable relevant trusts). The information held has been available to law enforcement agencies to help in the fight against money laundering and terrorist financing.
With the implementation of the Fifth Money Laundering Directive (5MLD), the TRS is about to undergo some significant changes. Importantly:
- more trusts, including UK resident trusts without UK tax liabilities and bare trusts will be required to register;
- information held on the register will be more widely available, including to anyone with a legitimate interest (demonstrated to the satisfaction of HMRC); and
- for taxable relevant trusts, more information about beneficial owners will have to be provided.
Earlier this year, the government held a technical consultation on the new rules (available here) and in July published a Summary of Responses which provide some welcome clarification on how the new rules will apply. The regulations (available here) came into effect on 6 October 2020.
Trustees will need to make sure they are fully informed of their obligations so that they can take appropriate and timely action to prepare for the new regime.
Which trusts must be registered?
It is important to bear in mind that the new rules add to the categories of trusts that must be registered. Taxable relevant trusts, which have been required to register since 2017, must therefore still be registered (and more information will now be required in relation to such trusts). We consider below the additional categories of trusts that will now be caught, but first the exemptions available.
The first step for trustees will be to determine if they come within the new, more wide-reaching, registration requirements.
Certain trusts that are deemed to be low risk for money laundering purposes (for example, because they are already regulated) are exempt from registration. The exemptions include, but are not limited to:
- trusts imposed by statute, such as intestacy trusts;
- UK registered pension trusts;
- charitable trusts regulated in the UK;
- pure protection life insurance policies and those paying out on critical illness or disablement;
- trusts for vulnerable beneficiaries or bereaved minors;
- will trusts created on death that only receive assets from the estate and trusts that only receive death benefits from a life insurance policy and are wound up within two years of death;
- existing trusts holding assets valued at less than £100 unless or until further assets are added; and
- co-ownership trusts where the trustees and beneficiaries are the same persons (for example, the joint ownership of a bank account).
The list of exemptions does not however include bare trusts.
The scope of the rules for non-exempt trusts
If the trust does not fall within one of the exemptions, it will have to be registered where:
- it is a UK resident express trust; or
- it is a non-UK resident express trust with at least one UK resident trustee that:
- enters into a new business relationship with an Obliged Entity on or after 6 October 2020 which is expected to last for at least 12 months; or
- acquires UK land or property, including leases of over seven years, or
- it is a non-UK resident express trust (with no UK resident trustees) that on or after 6 October 2020 acquires UK land or property, including leases of over seven years. This category has been introduced in order that the TRS is consistent with the proposed register for overseas entities acquiring UK property, due to be introduced next year. However, trusts that only come within the scope of registration because of this requirement will not be subject to the third-party data sharing provisions set out below.
If the trust has been registered under 5MLD in an EU Member State already, it is generally not required to register again under the TRS. However, trustees should note that if the trust is a taxable relevant trust it will still need to register on the TRS.
“UK resident trust”
- all trustees are UK resident; or
- there is a mixture of UK resident and non-UK resident trustees, where the settlor was UK resident and domiciled at the time the trust was set up or at the time the settlor added funds.
One that was deliberately created by the settlor rather than, for example, by court order or statute.
A business, professional or commercial relationship between a relevant person and a customer arising from the business of the relevant person and expected by the relevant person to have an element of duration.
An entity subject to the anti-money laundering rules. This definition is extended under 5MLD to letting agents and art market participants.
Can trustees of a non-UK resident trust instruct an investment manager, accountant or lawyer in the UK without coming within the new rules?
Yes. Entering into a business relationship in the UK will not in and of itself be sufficient to bring a trust within the scope of the rules. Instead, such a trust will only be required to register if it already has a nexus in the UK by way of having a UK resident trustee.
This means that many trusts (which do not have any UK resident trustees) will fall outside the scope of the new registration requirements.
However, if the trust does have a UK resident trustee, one important point to note is that the “12 month” requirement is forward looking, ie if you anticipate a business relationship will last for 12 months your obligation to register is triggered at that point.
What information must be provided?
All trusts within the scope of registration will be required to provide information about each beneficial owner, including their name, country of residence, nationality and the nature and extent of their beneficial interest. If the beneficial owner is a legal entity information including its name, registered/principal office and the nature of the entity’s role in relation to the trust must be provided.
For taxable relevant trusts, this beneficial ownership information is provided in addition to the existing, more extensive, reporting requirements which include information on the trust assets and their values. Trustees of trusts that come within the new rules but do not have a UK tax exposure may be relieved to find that not all of the detailed information required for taxable relevant trusts (including the information about trust assets) is required in relation to their trusts.
A settlor, trustee, protector, beneficiary (or class of beneficiaries) and any other individual with control over the trust. NB a potential beneficiary named in a letter of wishes is included. However, where beneficiaries are defined as a class (for example, “children and remoter issue”) and the class is not yet fully identifiable, it is sufficient to provide a description of the class.
Can the public access this information?
For most trustees, this is the most concerning element of the new rules. The government recognises that the majority of trusts are established for legitimate reasons and, particularly because trusts are so widely used in the UK, has sought a proportionate solution to the information sharing obligations imposed by 5MLD. The key point is that the register will not be fully publicly accessible.
Access to the information can be broken down into four distinct groups:
1. Law enforcement agencies
This is of course a vital element in the fight against money laundering and terrorist financing. Law enforcement agencies will continue to have access to TRS information (as they do now).
2. Obliged Entities
Obliged Entities will be required to obtain proof of a trust’s registration when entering into a business relationship in order to satisfy their customer due diligence requirements. However, unlike law enforcement agencies, they will not have automatic access to the TRS. Instead, the government has concluded that the onus should be on trustees to obtain the relevant extract from the register and share this with the Obliged Entity.
3. Legitimate interest requests
Any third party may request information from the TRS if they have a “legitimate interest”. The government recognises the importance of ensuring that this is not a tool used by tabloid journalists to obtain a juicy news story, nor by criminals looking to obtain information which can be used to blackmail or otherwise harm the individuals involved. With that in mind, certain safeguards have been introduced.
A request for information must be in relation to a specified instance of suspected money laundering or terrorist financing and form part of an investigation. The applicant will also have to provide certain information in relation to the trust in support of their request. This means that speculative searches will not be possible.
Trustees may take comfort from the government’s statement that “each request will be rigorously reviewed on its own merits”. We await further information on how this scrutiny will be applied in practice. In particular, it will be helpful to receive guidance about the appeals process that was referenced in the technical consultation.
4. Third country entity requests
Of greater concern to trustees is the fact that the “legitimate interest” test does not apply where the trust holds a controlling interest in a non-European Economic Area (EEA) legal entity (for example, a trust holding a Swiss company), and that legal entity is not required to register on a corporate beneficial ownership register in an EU member state. The justification for this is that layered ownership of this sort poses a greater risk of money laundering or terrorist financing.
A holding (directly or indirectly) of more than 50 per cent of the shares or voting rights in the legal entity. A person will also meet the definition of “control” where they have the right to appoint or remove a majority of the board of directors of the company (directly or indirectly) or where they have the right to exercise or actually exercise control.
Trustees will be required to declare whether they have a controlling interest in such an entity when they register on the TRS. If so, they will also need to provide details of the entity’s name, its governing law and its registered/principal office. Applicants for information will, however, still need to provide information (including their name, address, contact number and any organisation on behalf of which they are requesting the information). They will also need to state the intended use of the information and how this will help them to detect or prevent money laundering or terrorist financing.
The key point to note is that this is only relevant to trusts that are already registered on the TRS ie UK resident express trusts or non-UK resident trusts that have at least one UK resident trustee and hold UK land or fall within the rules regarding business relationships); the holding of a controlling interest in a non-EEA legal entity does not alone trigger a registration requirement.
Finally, as regards both third country entity requests and legitimate interest requests, exemptions may be available where disclosure of the information would you put the beneficial owner at disproportionate risk of fraud, kidnapping, blackmail or other forms of intimidation. Equally, where the beneficial owner is a minor or is legally incapacitated an application may be refused.
What are the deadlines for registration under the new regulations?
Taxable relevant trusts
- If a taxable relevant trust is set up before 6 April 2021 it must register by 31 January after the year in which the relevant UK tax liability arises. (Trusts liable for income tax and/or capital gains tax for the first time should comply with the existing deadline for registration of 5 October after the end of the tax year in which the charge arose).
- Otherwise, trusts set up on or after 6 April 2021 where the trustees become liable to pay UK taxes before 9 February 2022 must register by 10 March 2022.
- Trusts where the trustees become liable to pay UK taxes after 9 February 2022 must register within 30 days of being established.
Other trusts falling within the rules
- For trusts that are not taxable relevant trusts but that fall within terms of the expanded rules before 9 February 2022, the information must be provided by 10 March 2022.
- For trusts falling within the expanded rules after 9 February 2022, they must be registered within 30 days of being set up or, if later, 30 days from the date they first fall within the rules.
In both situations (whether a taxable relevant trust or not) trustees must update any changes to the information held on the TRS within 30 days from the date they become aware of the changes.
The government has said that it will provide “detailed guidance” to assist in the registration process in advance of the registration deadline.
What are the penalties?
The government acknowledges that lay trustees may not be aware of the requirements to register their trusts and this is reflected in the penalty regime.
The proposed regime will see trustees receiving a “nudge letter” if they fail to register or update details on the TRS. However, if it is determined that the failure was deliberate, the trustee may be exposed to a financial penalty.
What should trustees do now?
With the coming into force of the regulations and the further clarity provided in the Summary of Responses to the technical consultation, trustees are in a good position to start considering their reporting obligations. Although the TRS is not expected to be updated to take account of the new regime until 2021 and many trusts will not need to register before 10 March 2022, it will be important for trustees to ascertain whether they fall within the new rules sooner rather than later to give them sufficient time to meet the registration deadlines, especially as gathering information from beneficiaries can often take much longer than anticipated!
For more complicated scenarios and structures, advice should be taken as soon as possible.
With thanks to Christine Payne Smith for her input on this article.
If you require further information about anything covered in this briefing, please contact Oliver Piper, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2020