On 22 June 2017, as one of its first pieces of business, the new UK Parliament enacted the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (The Regulations). The Regulations implement Directive 2015/849/EU, the EU’s “4th Anti-Money Laundering Directive”, and took effect on 26 June 2017. Contained within the Regulations are provisions regarding a national “register of trusts”. Such national registers have been demanded by various EU Member States and institutions.

The register is not limited to trusts that are tax resident in the UK. Trustees resident outside the UK where there is some UK connection such as a UK-resident/domiciled settlor or beneficiary or an underlying asset in the UK need to check whether they are under an obligation to register and maintain records. They also need to be aware of the information that will need to be submitted to HM Revenue & Customs (HMRC) in order to register, and the privacy implications this may have for the settlor, beneficiaries or other persons connected with the trust.

Which trusts have to register?

“Relevant trusts” must register (regulation 45).

There are two categories of “relevant trusts”. The first are UK express trusts. (An express trust, put simply, is a “deliberately” created trust and is therefore very broad – the trust may well be considered transparent or disregarded in other jurisdictions such as the US or Switzerland.) A trust is a UK trust if either:

(a)   all the trustees are UK resident; or

(b)   (i) at least one trustee is UK resident; and

(ii) the settlor was resident and domiciled in the UK at the time when either the trust was set up, or when the settlor added funds to the trust.

This means that most trusts that are considered tax resident for domestic UK income and capital gains tax (CGT) purposes will be relevant UK trusts even if they are considered resident in another jurisdiction for the purposes of a tax treaty between the UK and that other jurisdiction. We say “most” trusts as technically for income tax and CGT a trust with mixed UK and non-UK resident trustees will be UK resident if the settlor was resident or domiciled in the UK at the time when either the trust was set up, or when the settlor added funds to the trust. This will leave certain UK tax resident trusts, most notably those funded by a UK resident non-domiciled settlor with mixed UK and non-UK resident trustees, as non-UK trusts for the purposes of the Regulations.

The second category of registrable relevant trusts is a non-UK express trust which:

(a) receives UK source income; or

(b) has assets in the UK,

on which it is liable to pay any one or more of income tax, CGT, Inheritance Tax (IHT), Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (Scotland) Act 2013 (in Scotland) or Stamp Duty Reserve Tax (SDRT).  Note that none of Corporation Tax, Annual Tax on Enveloped Dwellings (ATED) or Value Added Tax (VAT) is a relevant tax for these purposes.

This second head of “non-UK express trusts” may be relevant to a trust with trustees anywhere in the world and under any governing law.  All trustees of “relevant” trusts must maintain enhanced records (regulation 44) and, if they are chargeable to relevant taxes in the UK, need to register (regulation 45).  This would appear to mean that non-UK trusts which hold UK assets don’t need to register so long as those assets do not produce income or gains that are taxable in the UK, and so long as the assets do not generate an IHT charge.

In our view, it appears under the Regulations as drafted that non-UK trusts are only relevant trusts if they have relevant UK tax events.  It would seem that where UK assets are held by an underlying non-UK holding company, or UK source income arises within such a company, this will not in itself result in the trust being registrable. Assuming that this is correct, this will take a lot of non-UK trusts out of the scope of the register.  Confirmation from HMRC that they agree with this interpretation would be welcome.

For completeness, the new rules also apply to foundations and other legal arrangements similar to a trust.  Unlisted UK bodies corporate must also maintain enhanced records and provide certain specified identification information to relevant persons or law enforcement agencies on request.

When do they have to register?

The legislation introducing the register takes effect on 26 June 2017 and at a first glance it would seem that the first registrations will need to take place by 31 January 2018.

In fact, and confusingly, not all of the potential deadlines for registration are contained in the Regulations.  This is because the register is to perform two functions:

• It is the register of “beneficial ownership” envisaged under the EU 4th Anti-Money laundering Directive and implemented by the Regulations; and
• It is also to be the means for trustees to register trusts with HMRC for the purposes of obtaining a Unique Tax Reference Number (UTR) and delivering tax returns, such as self-assessment for income tax and CGT as prescribed under the Taxes Management Act 1970.

This means that the deadlines imposed by the Taxes Management Act 1970, the Inheritance Tax Act 1984 and other relevant UK tax legislation may also apply.

At the beginning of May 2017, HMRC withdrew Form 41G, under which trusts used to register themselves for tax reporting purposes with HMRC in accordance with the Taxes Management Act 1970. HMRC will be setting up and publicising a new “portal” for trustees to register trusts over the course of the summer, although we do not yet have a precise date. Form 41G is replaced by the new (as yet to be launched) “portal”, but trustees should note that even if they have previously registered with HMRC using Form 41G in order to file for UK taxes, they are still under an obligation to register on the new register for each and every year that they are a relevant trust.

This is where it gets complicated:

• Trusts (UK or non-UK) that were liable for relevant UK taxes in the 2016/17 and earlier tax years and that had already registered with HMRC using Form 41G become registrable from 26 June 2017 but will have until 31 January 2018 to supply HMRC with the necessary information for the register (regulation 45(3)).
• If a UK or non-UK trust was only settled during the 2016/17 UK tax year or only became liable for income tax or CGT for the first time in that tax year and it has not previously registered with HMRC using Form 41G then the trust will only have until 5 October 2017 to register (6 months after the end of the 2016/17 tax year, in accordance with s7 Taxes Management Act 1970).
•  For trusts that become registrable for reasons of UK income tax or CGT during 2017/18 or subsequent tax years, trustees will have until 31 January following the end of the UK tax year (6 April to 5 April) in which the trust becomes registrable either by becoming (i) a UK express trust or (ii) a non-UK express trust undergoing a relevant UK taxable event (regulation 45(3)).
• Some clarification will be needed in relation to trusts becoming registrable by virtue of IHT, SDLT or SDRT. Where a trust has not already registered with HMRC and the taxable event causing the trust to be registrable relates to IHT, in practice we assume that the trustees will need to register within 6 months of the chargeable event occurring as tax will be due (Part VIII Inheritance Tax Act 1984). Where the events relate to SDLT and SDRT the prescribed deadlines for payment of tax are far shorter so it remains to be seen how swiftly trustees will need to register or indeed whether non-UK trustees are going to have to anticipate transactions over UK land or shares that trigger these taxes well in advance in order to be registered in time.

The fact that the deadlines for registration are stipulated by a number of unconnected pieces of UK legislation is unfortunate and will make matters very complicated for trustees of non-UK trusts.  It is very much hoped that HMRC will provide consolidated guidance on the issue so that trustees can gain a clearer picture.

Some examples of when non-UK trusts need to register

The examples below are not exhaustive of all of the situations in which a non-UK trust may become registrable, but they cover some common scenarios:

The Alpha Trust

The trustees and the settlor of the irrevocable discretionary Alpha Trust are both non-UK resident and the trust was settled on 1 January 2012.  None of the beneficiaries are UK resident.  The settlor is a beneficiary and is not UK domiciled.  The trustees acquired on 9 January 2012, through a BVI nominee company, shares in a listed UK company and have continued to hold the shares.  The shares pay dividends on a quarterly basis.

The trustees are receiving UK source income and hold UK assets (the nominee company can be disregarded) but are not subject to UK income tax on the dividends paid.  The trustees therefore are not required to register in order to pay income tax or deliver a self-assessment tax return.

However, if the trustees are still holding the UK shares (or other UK assets) on 1 January 2022, a ten-yearly IHT charge will be payable by the trustees.  This will cause the trustees to have to register the trust by 1 July 2022 and to have paid the IHT due by that point.

The Alpha Trust – the settlor moves to the UK

In the above example, if the settlor were to become UK tax resident then he would be liable for UK income tax on an arising basis on the UK source dividends.  However, the trustees would not have any liability for income tax so the position with respect to registration remains the same.

The Alpha Trust – a beneficiary moves to the UK

If the settlor remains non-UK resident but one of the other beneficiaries moves to the UK during the 2017/18 UK tax year then the trustees themselves become liable to UK income tax on the dividends under s812 Income Tax Act 2007, even if no distribution or benefit is made to the UK resident beneficiary.  This taxable event would cause the trustees to have to register the trust and submit a self-assessment trust tax return by 31 January 2019.

The Alpha Trust – the UK shares are transferred to a non-UK holding company

If the UK shares are contributed to a non-UK (say another BVI) company, which becomes the beneficial owner of the shares, then the UK taxable events that would cause registration would cease.  Even if there is a UK resident beneficiary, the trustees will no longer be subject to income tax on the dividends.  In relation to IHT, a UK situs asset is no longer held by the trustees and therefore no ten yearly charge will arise in 2022. Moreover, although clarification is needed from HMRC, the Regulations would appear only to treat trusts that hold UK assets or receive UK source income directly at trust level (and not in an underlying holding company) as being capable of being relevant trusts and so registrable.

The Beta Trust

The Beta Trust is settled by a UK resident non-UK domiciled settlor on 3 July 2017. The trustees are the settlor’s Swiss resident brother and his Swiss lawyer. The trust assets are shares in a Panamanian company that holds a portfolio at a Swiss private bank. The settlor and his spouse are irrevocably excluded from benefit and the beneficiaries are the settlor’s UK resident adult children. On 31 August 2017, the settlor ceases to be UK tax resident. On 14 September 2017 the Panamanian company pays a dividend of CHF100,000 to the trust. The trustees then resolve to lend the CHF100,000 to one of the settlor’s UK resident children at HMRC’s official rate of interest.

When the trust is settled on 3 July 2017 there are no UK assets or UK source income at trust level so the trust is not registrable.  Making the loan to the UK resident beneficiary on 14 September 2017 will give rise to UK source income in the trust on which the trustee is liable to tax.  Accordingly the trustees will need to have registered the trust and submitted a self-assessment trust tax return by 31 January 2019. Were the loan to be interest free or with deferred interest then there would be no immediate UK tax event for the trustees causing registration.  This would however have UK tax consequences for the beneficiary.

The Beta Trust – trustee moves to the UK

Assume that the loan was made interest free so that registration is avoided for the time being. The settlor’s brother then becomes UK tax resident on 20 April 2018. As the settlor was himself UK tax resident when the trust was funded, the trust will have become UK tax resident and although still a non-UK relevant trust for the purposes of the UK trusts register.  Confusingly, as the settlor was not both resident and domiciled when the trust was funded, it is not treated as a “UK relevant trust” for the purposes of the Regulations. The distinction in this case is immaterial as the trustees will still have until 31 January 2020 to register the trust and to submit a self-assessment trust tax return.

What details have to be submitted to the register?

A considerable amount of detail has to be delivered.  The information to be provided can be categorised as follows:

1. Administrative details

These details need to be provided:

• The full name of the trust;
• The date on which the trust was set up;
• A statement of accounts for the trust, describing the trust assets and identifying the value of each category of trust assets at the date on which the information is first provided  (including the address of any property held by the trust) (this is very far reaching and it will cover all trust assets, not just UK ones);
• The country where the trust is considered to be resident for tax purposes;
• The place where the trust is administered;
• A contact address for the trustees; and
• The full names of any advisers who are being paid to provide legal, financial or tax advice to the trustees in relation to the trust.

2. Details for each “beneficial owner”

Trustees need to note that the definition of beneficial owner is broader than the concept of a “controlling person” for Common Reporting Standard.  In relation to a trust, this term means:

• The settlor;
• The trustees;
• The beneficiaries where individuals are identified;
• Where the individuals (or some of the individuals) benefiting from the trust have not been determined, the class of persons in whose main interest the trust is set up or operates; and • Any individual who has “control” over the trust.

The Regulations consider an individual with the power (whether exercisable alone, jointly with another person or with the consent of another person) under the trust instrument or by law to, broadly, (a) deal with trust property, (b) vary or terminate the trust, (c) add or remove beneficiaries or trustees or give another person control over the trust or (d) direct, withhold consent to or veto the exercise of the aforementioned powers, to have “control” over the trust. For all of these individuals, the trustees must provide the:

• Full name;
• Date of birth;
• Details of the individual’s role in relation to the trust;
• National Insurance number or unique taxpayer reference;
• If the individual has neither of these, then the individual’s usual residential address;
• If this residential address is outside the UK, then either
  1. the individual’s passport number or identification card number, with the country  of issue and the expiry date of the passport or identification card; or
  2. if the individual does not have a passport or identification card, the number, country of issue and expiry date of the equivalent form of identification.

3. Transactions with relevant persons

This final category of information to be provided shows that the intention of the register was not only to gather information on trust structures and their beneficiaries but also on those advising in relation to the trust or transacting with it.

Relevant persons are, in essence, professionals, financial intermediaries and others who are regulated under the Regulations and required to conduct due diligence. It is a sensitive question as to whether the definition of “relevant persons” extends to single family offices but given that most perform investment management, legal and/or accountancy functions, it would seem likely in many cases. A registration requirement is triggered if a trustee, whilst acting as a trustee of a relevant trust, enters into a relevant transaction with a relevant person or forms a business relationship with a relevant person.

The definition of a “relevant person” in the Regulations includes financial institutions, auditors, insolvency practitioners, external accountants and tax advisors, independent legal professions, and trust or company service providers acting in the course of business carried on by them in the UK (regulation 8).

In such cases, the following information must be supplied about that relevant person:

(a) where the relevant person is an individual, the same information as for a beneficial owner; or

(b) where the relevant person is a legal entity:

• The corporate or firm name;
• The unique taxpayer reference, if any;
• The registered or principal office of the legal entity;
• The legal form of the legal entity and the law by which it is governed;
• If applicable, the name of the register of companies in with it is entered (including details of the EEA state or third country in which it is registered), and its registration number in that register; and
• The nature of the entity’s role in relation to the trust.

Reporting of protectors

Subject to the nature of his or her role under the terms of the trust, we would generally consider a protector to be caught by the new rules.

The Regulations and the Common Reporting Standard (CRS) will together have a significant dissuasive effect on individuals considering taking on protectorships where their powers will result in them being reported under these regimes.  In future, it is possible that we may see an increased use of nebulous protectorships (or other advisory roles) where there are no such powers but the trustee is nevertheless required under the trust deed to consult the protector – an arrangement which may provide some comfort to the settlor, but which may avoid reporting in relation to the individual acting as the protector/advisor.  Where the CRS is concerned, whether reporting is avoided in this scenario (in some cases merely by not calling the person to be consulted a “protector”) is a controversial issue, which is being widely debated, but is beyond the scope of this note.

Reporting of potential beneficiaries named in a letter of wishes from the settlor (or similar document)

The identification of beneficiaries and beneficial class is where the reporting mechanism differs significantly from CRS.  There is no requirement that the beneficiaries have a fixed 25% entitlement or are in receipt of distributions.  Moreover, it is even extended to “potential beneficiaries” who are identified in a trust document, including in a letter of wishes from the settlor.  This will only be a concern for individuals named in a letter of wishes who are not already expressly identified as a beneficiary in the trust instrument.

The Explanatory Memorandum accompanying the Regulations explains that a “potential beneficiary” refers to someone named in a letter of wishes or other relevant document who clearly stands to benefit from the trust as a result of the settlor’s express wishes, but would not include a person who is named in a document but is unlikely to benefit.  No further guidance is provided as to what is meant by “unlikely to benefit”, and given the potentially very severe sanctions it is likely that anyone identified in a letter of wishes whether or not included for the time being as a beneficiary in the trust instrument will be disclosed.

Letters of wishes and other documents that would cause a potential beneficiary to be identified for the register must be issued from the settlor. This qualification may lead to nefarious means of wishes being expressed or confirmed in order to side-step the registration requirement. Although perhaps technically possible, resorting to such means is probably ill advised. When enforcing the register a purposive construction of these rules may be adopted and, in any event, the Regulations may simply be amended or clarified if HMRC and the UK Government become aware of such practices. Moreover, when investing, transacting and taking advice, trustees are unlikely to find other intermediaries taking due diligence on the trust to fulfil their own obligations under the Regulations amenable to such practice in today’s compliance driven and risk-averse environment.

Identifying beneficiaries from a letter of wishes is a major departure from the principle that a letter of wishes is a private document and not routinely disclosable.  However, given that the English Family courts have had no issue with requiring trustees to provide disclosure of letters of wishes in proceedings then perhaps it is not as revolutionary a step as some might think.

Taken together, the information to be submitted to the register goes far beyond the requirements of Common Reporting Standard and FATCA and is far more intrusive. In many cases, disclosure of the information in the trustees’, beneficiaries’ or advisers’ jurisdiction of residence without authorisation under local law may conflict with the trustees’ obligations in relation to the register. These are issues on which trustees will need to take advice in relation to the relevant jurisdictions and seek to find ways to resolve the issues.

Who can view the register and what is it for?

The UK Government has stated that the Regulations are intended to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system.  For the time being, at least, the register is therefore not a public one.

The register may be inspected by any “law enforcement authority” (regulation 44(10)), a category which includes:

• The Commissioners (HMRC);
• The Financial Conduct Authority;
• The National Crime Agency;
• The various UK police services; and
•  The Serious Fraud Office.

It is notable that the categories of persons with access to the register are arguably much narrower than those set down in Article 14 of the EU’s 4th Anti-Money Laundering Directive.  Article 14  provides that “persons who are able to demonstrate a legitimate interest with respect to money laundering, terrorist financing, and the associated predicate offences, such as corruption, tax crimes and fraud should also have access to beneficial ownership”. This perhaps leaves open the possibility that investigative journalists or certain non-governmental organisations with an anti-corruption brief may seek to apply to court for access on the grounds that the UK (as at least a current member of the EU) has not fully implemented the Directive.

Perhaps even more concerning is that the EU’s draft 5th Anti-Money Laundering Directive proposes to make registers of beneficial ownership, including the trusts register in each Member State, publicly accessible. Of course this proposal may not be implemented or, even if it is, the UK may no longer be in the EU by that point and therefore bound by the further Directive. That said, even within the UK, there may well be further political pressure for registers of beneficial ownership to become fully public.

Were the trusts register one day to become publicly accessible, one of the biggest concerns (aside from the significant invasion of privacy and threat to personal security) is how much historic information will become available. Although a non-UK trust can be on the register for one UK tax year but not another, the historic record will presumably be left behind, just as it would be on a company register.

What are the penalties for failing to register and how can they be enforced?

The penalties are potentially severe, with civil and criminal proceedings both possible.  Civil proceedings are largely the responsibility of supervisory authorities, and these have the power to impose fines and professional sanctions. We await further guidance and rules from these bodies as to just how draconian any penalties and sanctions may be. Imposing them outside the UK may not be straightforward but it should be borne in mind that for a non-UK trust to become registrable there will presumably be UK assets or UK-source income against which an order might be enforced.  More broadly, a trustee who has suffered some form of public sanction in the UK may well, in the current compliance-driven environment, find it hard to find willing counterparties for advice and financial transactions in future.

If issued, criminal proceedings may lead to a fine and up to two years in prison.  If, however, an individual took all reasonable steps and exercised all due diligence to avoid committing the offence, they will have a defence to the criminal offence.  Again, legal enforcement outside the UK may be difficult in some circumstances, and much may depend on extradition treaties and the like.  However, the reputational consequences and commercial implications of suffering criminal sanction, even if not enforceable, may be a significant deterrent.

When can we expect further guidance?

It is not yet clear if and when HMRC will publish any further guidance on these regulations although there is undoubtedly a need for it.  Something may appear later in the summer when HMRC launches the portal for registration.  Two areas need significant clarification:

• are UK assets or UK-source income of a company held by a non-UK trust sufficient to trigger registration if relevant UK taxes arise? (as discussed above, our interpretation of the Regulations is that they are not); and
•  how do all of the various registration deadlines imposed by the Regulations and other earlier administrative tax legislation such as the Taxes Management Act 1970 interrelate?  Can HMRC produce clear and comprehensive guidance so that non-UK trustees know when they have to register?

What are the implications for trustees in terms of maintaining records and preparing or amending trust documents including letters of wishes?

As the breadth of the information to be gathered on the register is far more onerous than Common Reporting Standard and FATCA, this is going to mean that non-UK trustees with even a fairly tenuous UK connection will need to revisit yet again their take-on procedures and information gathering and record keeping so as to ensure that they have the relevant information. Since the trusts register is meant to be implemented in other EU Member States this imperative probably extends to trusts with any EU connection.

In terms of drafting and amending trust documents, information will also have to be provided on potential beneficiaries such as those named in a letter of wishes from the settlor.

“Document” is defined widely as “anything in which information of any description is recorded”, so this provision could not be avoided by a video or audio recording of a settlor’s wishes.

The disclosure obligations may well mean that more trust documents, including letters of wishes, will tend to try and describe beneficiaries generically, defining the class rather than naming individuals, so that there is some attempt to preserve beneficiaries’ privacy. As mentioned above, more nefarious practices may begin to be adopted to try and record a settlor’s wishes but these would not be advisable given that the Regulations may well be amended to counter such practices.

How can we help?

The Regulations are complex in many aspects and introduce further substantial burdens on trustees, in terms of registering and then maintaining an entry on the trust register and in terms of new record keeping requirements. The implications for settlors, beneficiaries and others connected with a trust are very significant, particularly in terms of the further invasion of financial privacy. The penalties for failure to comply are potentially serious. We would be happy to provide guidance tailored to individual trusts. We can advise trustees, settlors and beneficiaries on all of these aspects and implications and provide guidance and assistance with the timing of registration to ensure full and time compliance with the Regulations.

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This article was written by Mark Summers. For more information please contact Mark at mark.summers@crsblaw.com or on +41 (0)43 430 02 40 .