An update on new UK Trust regulations – A shake-up following an EU-wide directive to tackle money laundering
Since 2017, certain trusts have had an obligation to report information to the Trusts Registration Service (TRS). The next phase of the EU directive is set to increase the number of trusts that must submit their reports. Significantly, this will be a partially open register to the public which can lead to an erosion of privacy and increased scrutiny as currently the register is only limited to law enforcement authorities gaining access and is not publicly available. In this article, we explore the type of trusts this regulation will affect and what dates to watch out for. We also assess the additional risks trustees may be burdened with and what solutions are available.
What is changing?
Under the current proposed rules, all UK ‘express trusts’ will have to register on the TRS. An express trust is one created on purpose and not one imposed by a court. This could also mean that trusts which are producing no income or gain, but holding assets will still need to be registered.
Naturally, this change in regulation will affect hundreds of thousands of trustees and their trusts. New access on the information available will be given to obliged entities (advisers and financial institutions), anyone who can demonstrate a ‘legitimate interest’ or a person who files a written request in relation to a trust which holds a controlling interest in a non-EU company. Therefore greatly removing the privacy trusts will have previously benefitted from.
The government have advised that the ‘legitimate interest’ application process aims to “ensure that each request will be reviewed on its own merits and access given only where there is evidence that it furthers work to counter money laundering or terrorist financing activity. The government believes that this approach strikes the right balance between the conflicting demands of transparency and privacy.”
There will also be an increased administrative burden for trustees which could leave them personally at risk; with many lay trustees, who are either unaware of changes in trust law or keeping abreast of these regulatory changes also exposed.
Trustees will need to make sure they are fully informed of their obligations so that they can take appropriate action to prepare for the new regulations.
Guidance can be found here: the government held a technical consultation on the new rules (available here) and in July published a Summary of Responses which provide some clarification on how the new rules will apply. The regulations (available here) came into effect on 6 October 2020.
Failure to register a trust when required to do could lead to penalties, with many trustees being personally liable if they are seen to have been negligent.
Trusts affected include but not limited to:
An express trust: one that was deliberately created by the settlor rather than, by court order of statue e.g:
- Bare trusts: In a bare trust, the trustee holds assets for the beneficiary until they turn 18 (or 16 in Scotland) at which point they are entitled to the capital and income. These will be commonly used when a parent or grandparent wants to make a gift to a child.
- Discretionary trust: There are often used within families. Trustees have the discretion to decide when to distribute income or capital, and to which of the named beneficiaries.
- Inheritance tax on discretionary trust assets is charged at up to 6% every 10 years on the value of the assets above the current nil-rate band of £325k.
- Accumulation trust: Accumulation and maintenance trusts are similar to discretionary trusts, but trustees can ‘accumulate income’ within them. They are common in trusts for children and adults under the age of 25.
- Interest in possession trust: This is also called a life interest trust, these allow the beneficiary to receive the net income the trust earns while excluding them from any right to the capital. On the death of the life tenant, or if their interest is terminated earlier, there will either be ongoing trusts or outright gifts for other beneficiaries. The beneficiary is taxed at their personal rate of tax but can claim credit for the basic rate paid by the trustee.
A non- UK resident express trust that enters into a new business relationship with an obliged entity on or after 6th October 2020 which is expected to last for at least 12 months and where the trust has at least one UK resident trustee.
What information must be provided?
All trusts within the scope of regulation will be required to provide information about each beneficial owner, which will include their name, country of residence, nationality and the nature and extent of their beneficial interest.
For taxable relevant trusts, this beneficial ownership information is provided in addition to the existing 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.
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 in their consultation advised that lay trustees may not be aware of the requirements to register their trusts and this will be reflected in the penalty regime. Whilst ‘hazy’ in confirmation of financial penalty amounts, trustees will receive letters if they fail to register or update the TRS and if deliberate avoidance of regulation is found then financial penalties will be enforced.
Is there an insurable solution?
Whilst unable to insure against fines and penalties, lay trustees can insure against defence costs and the expenses involved including investigations. Importantly enhanced coverage is also available for wrongful acts (an actual or alleged wrongful act or omission on the part of a trustee acting in his/her capacity as a trustee). At Lockton, we have a market-leading product which will protect past, present and future trustees indemnifying the trust as a whole and aiming to give some peace of mind that a large element of possible risk has been transferred. https://www.locktonsolicitors.co.uk/insurance-services/trustee-liability.html
Should this be of interest a complimentary insurance health check is also available for all the trust assets, to advise trustees that all assets are correctly insured for and on behalf of the trust.
Lockton’s Private Client specialists assist with the risk management and insurance requirements of the trust’s assets, including residential and commercial property, fine art, collectables, chattels and jewellery.
If you require further information about anything covered in this article, please contact Arjun Rohilla or Charles Hamilton Stubber.
This publication is aimed to provide a general summary. It should not replace any legal advice tailored to your specific circumstances.