On 6 October 2020, the Fifth Money Laundering Directive ((EU) 2018/843) (MDL5)) was implemented to reinforce the United Kingdom’s money laundering regime. This had the effect of tremendously broadening the scope of the types of trusts required to be registered on the Trust Registration Service (TRS) (for more information, please refer to our previous On the Subject here). Final regulations and guidance were provided in late 2021, and the registration deadline was pushed back to 1 September 2022. This is fast approaching, and we urge you to consider the below.
If the answers to any of the questions below are ‘yes’, then you should consider whether you are covered by a requirement to register under the TRS:
- Is the trust a UK tax resident trust?
- Do you have a nominee agreement governed by UK law in place?
- Is the trust established under English (or another UK jurisdiction’s) law?
- Is the trust itself liable to one of more of UK income, capital gains, inheritance, stamp duty land (or its Scottish/Welsh equivalents) or stamp duty reserve taxes?
- Did the current trustees become the registered owners of land in the UK on or after 6 October 2020?
- Did the trust start a business relationship with a UK service provider on or after 6 October 2020?
Just because the answer to one of these questions is yes does not mean registration under the TRS is needed, but advice should be sought to confirm if registration is needed or if exemptions apply.
Do I need to register with the TRS?
You must register if the trust (whether it is a UK trust or a non-UK trust) is liable for any of the following taxes: Capital Gains Tax, Income Tax, Inheritance Tax, Stamp Duty Land Tax, Stamp Duty Reserve Tax, Land and Buildings Transaction Tax (in Scotland) or Land Transaction Tax (in Wales). This has been the case since June 2017.
In addition, the following types of trusts now must register even if they have no tax liability:
- All UK express trusts — unless they are specifically excluded; and
- Non-UK express trusts in the following circumstances:
a. If a non-UK express trustee becomes the registered owner of an interest in UK land on or after 6 October 2020; and
b. If a non-UK express trust has a at least one trustee resident in the UK and enter into a ‘business relationship’ with a UK service provider (i.e., solicitor, accountant, investment manager) on or after 6 October 2020.
Is the trust a UK express trust?
Her Majesty’s Revenue and Customs (HMRC) has stated that an express trust is one that has been deliberately created by a settlor, usually in writing. This includes common forms of trusts, such as discretionary trusts, interest in possession trusts and bare trusts.
Trusts that come into being by operation of law or imposed by a Court or legislation are not express trusts and, so, the following trusts are not subject to the extended TRS regime:
- Implied, resulting or constructive trusts;
- Trusts which arise on intestacy; and
- Trusts created by court orders (such as following a dispute or on divorce).
It is important to note that there is no backstop date, such that any UK express trust provided in existence on or after 6 October 2020 will be to be registered.
Certain UK express trusts are excluded from registration by Schedule 3A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulation 2017, either because they are already subject to a registration process or because they are deemed low risk.
Is the trust a non-UK express trust owning an interest in land?
If a non-UK express trustee becomes the registered owner of an interest in UK land (including leases for a term of more than seven years when created) on or after 6 October 2020, it will have to be registered with the TRS, provided that the trustees acquire the interest in land for the trust and are registered as the legal owners at HM Land Registry.
Thus, a non-UK express trust will not need to register with the TRS if the trust owns a company which acquires an interest in land. However, it will most probably need to register under the Register of Overseas Entities (ROE). The ROE is expected to enter into effect by early 2023 and will involve the registration of non-UK trustees who own UK land with Companies House and not just HMRC (more information to follow on that).
Is the trust a non-UK express trust with at least one UK-resident trustee and enters into a ‘business relationship’ with a UK service provider?
For the purposes of the TRS, a business relationship is a business, professional or commercial relationship between the trustees and a ‘UK relevant person’. HMRC has confirmed that for a trust to be registerable under this category of trusts, the business relationship will have to have an element of duration. This would normally involve an ongoing relationship that at the outset is expected to last for more than 12 months. It is important to note that business relationships that were already in existence before 6 October 2020 do not bring a trust into the scope of registration.
A ‘relevant person’ includes but is not limited to financial institutions, accountants, tax advisers, legal professionals, estate and letting agents, high value dealers and trust or company service providers. These organisations are described as UK relevant persons if:
- The registered or head office is located in the UK and the day-to-day management of the business is the responsibility of that office or another UK office; or
- The business in question is carried out in the UK.
A trust will not be required to register with the TRS if the trustees own a company (as a trust asset) which enters into the business relationship with the UK relevant person. To fall within the registration requirements, the business relationship would need to be entered into by the trustees themselves.
The deadline for non-taxable trusts which fall within the expanded TRS regime before 4 June 2022 is 1 September 2022. Where trusts only become registerable on or after 4 June 2022, the trustees will have to register within 90 days of the trust becoming registerable.
Taxable trusts must register by 31 January following the end of the tax year in which the trust acquires a liability to relevant UK tax unless they are liable for income tax and/or capital gains tax for the first time (in which case the deadline will be 5 October after the tax year in which the trustees first become liable for income tax).
Changes to TRS records on trusts and/or beneficial owners must be notified within 90 days of the date of the change. The TRS also gives rise to record-keeping obligations.
Trustees have a legal duty to comply with HMRC reporting requirements. They should take specific legal advice based on their trust’s circumstances to establish their obligations in a timely manner given the approaching deadlines for registration.
A failure to register a trust or a failure to notify any change of information by the due date can result in penalties being chargeable on the trust, which can include a percentage of the trust’s total tax liability for a relevant year.