A trust is a very common arrangement that most individuals will be a part of at some stage in their lifetime, even if they are not aware of it.
A trust relationship is where a person or persons hold an asset or multiple assets on behalf of another person or persons. The person holding the asset is known as a trustee and the beneficiaries are those for whom the asset is held.
What is the Trust Registration Service?
HMRC created the Trust Registration Service in July 2017 as part of a wider package of anti-money laundering regulations. These regulations substantially expanded in October 2020 to include UK non-taxpaying express trusts and new requirements for some non-UK trusts.
What are the obligations for trustees?
Under the regulations, trustees are now obliged to maintain a register in writing about the trust, its assets and the persons or entities connected to the trust. This would usually include the settlor, trustees and beneficiaries – the trust’s “reportable persons”. The trustees are obliged to register some of these details on a trust register with HMRC through the TRS.
Do the regulations apply to all trusts?
Unless specifically excluded, the regulations will apply to:
- UK express trusts;
- a non-UK trust which has at least one UK resident trustee and enters into a business relationship within the UK on or after 6 October 2020 or acquires an interest in land in the UK on or after 6 October 2020; and
- a non-UK trust which has no UK resident trustees and the trustees acquire an interest in land within the UK on or after 6 October 2020.
What trusts are excluded?
Certain trusts will not need to be registered through the TRS. These include:
- legislative trusts and those imposed by court order;
- pension scheme trusts that are registered pension schemes;
- charitable trusts that are registered as a charity or are excluded from doing so;
- trusts created on the transfer or disposal of an asset until the transfer or disposal of legal title is completed;
- co-ownership where the trustees and beneficiaries of jointly held property are the same person;
- trusts meeting legislative requirements; and
- certain commercial trusts.
The position is complex and advice should be taken to clarify the trust’s status under the regulations and the need to register.
What information must trustees provide?
Trustees must maintain records, and the information required will be dependent on their tax status.
Trustees will need to provide information on the entities connected to the trust. This information may include full names, national insurance numbers, dates of birth, tax reference numbers, the nationality and tax residency of the entities, and whether the individuals being reported have mental capacity.
Information about the trust will also be required. This can include the full name of the trust, the date and method of creation, the trust assets and the country in which the trust is resident for tax purposes.
What are the deadlines for trust registration?
Any trust in existence as at 6 October 2020 that is not specifically excluded will be required to comply with the updated registration requirements, even if it has subsequently come to an end.
These trusts, along with those created since 6 October 2020, will need to register by 1 September 2022.
Trusts created after this date will need to register under the TRS within 90 days of creation. It is therefore prudent to ensure that trustees are aware of their requirements and collate the required information before the trust is created.
Trustees will also need to report any changes or discrepancies to the information previously registered within 90 days.
What if trustees fail to comply with these requirements?
Civil and criminal sanctions – including imprisonment, a fine or both – are a possibility, particularly if, along with contravention of a requirement, it prejudices investigation or provides false or misleading information.
It is important to ensure that the correct records are maintained and the trust is properly registered.
In typical property ownership structures, when would these registrable scenarios arise?
Below are five examples of registrable scenarios.
Example A
An individual holds an interest in a property and subsequently transfers a part of the beneficial interest to another, typically a spouse or children.
If the title at the Land Registry is not updated to match the beneficial ownership, there will be a requirement to register this arrangement. If the title is updated, a specific exemption will apply for co-ownership arrangements where the trustees and the beneficiaries of a trust of jointly held property are the same persons.
Example B
The owners of flats in a building undergo the process of collective enfranchisement in order to acquire the freehold of the building. Under this process, a nominee purchaser, typically a company, is used to acquire the freehold for the benefit of the flat owners.
The nominee company will hold the freehold interest for the benefit of the flat owners. The company must register as the trustee and each flat owner as a beneficiary.
Example C
A group of connected companies wish to acquire a commercial property for the benefit and use of a limited partnership. Two simultaneous transfers will facilitate this transaction.
The first transfer is between the seller and a company which is a partner of the limited partnership. This company subsequently transfers the property interest to two nominees, Nominee One Ltd and “Nominee Two Ltd.
The initial acquisition of the property by the partner company should not trigger any registration requirements, assuming the transfer occurred for commercial reasons on a short-term basis.
After the transfer of the legal ownership of property to the nominee companies, there is an ongoing trust relationship that triggers the requirement to register.
In this scenario, the nominee companies are holding the property interest for the benefit of the limited partnership. A single registration must take place, with Nominee One Ltd and Nominee Two Ltd being reportable as trustees and the limited partnership as the beneficiary.
Example D
A property asset investment fund wishes to acquire a student accommodation block. The PAIF intends to use a bank as a depositary, which, in turn, uses two nominee companies (Nominee One and Nominee Two) to hold the legal title, and these will be registered proprietors at the Land Registry. Nominee One and Nominee Two will hold the legal title on trust for the PAIF.
A single registration must take place, with Nominee One and Nominee Two being reportable as the trustees and the PAIF as the beneficiary.
Example E
Under the terms of a lease, two or more tenants contribute towards the costs by the payment of service charges to the landlord. The landlord holds these funds to settle costs incurred in connection with the matters for which the relevant service charges were payable. In short, the landlord is holding these funds on trust for the tenants.
The landlord will not need to register this arrangement as the holding of tenants’ contributions for the purposes of section 42 of the Landlord and Tenant Act 1987 is specifically exempt under the regulations.
Who can access the registered information?
The information held by HMRC is not a public record. It can be accessed by those who demonstrate a legitimate interest in the beneficial ownership of a trust. In a recent consultation, HMRC stated that the “legitimate interest” application process will aim to ensure that each request will be reviewed on its own merits. Access will only be given where there is evidence that it furthers work to counter money laundering or terrorist-financing activity.
Future developments
Currently, trustees are only required to register the details of parties connected to the trust. If the beneficiary is a company or similar entity, there is no requirement to provide details of the beneficial owners of the beneficiary company.
Following the recent Pandora Papers leak, there continues to be pressure for greater transparency. The TRS might be expanded into a tool to provide this transparency by requiring the beneficial owners of underlying entities to be included within registrations.
However, before any further developments can take place, greater clarification of the arrangements that are currently caught by these regulations is needed. The legislation is extremely wide ranging, and it is arguable that the practicalities were not thoroughly considered before the legislation was implemented.
Further guidance is expected from HMRC regarding these requirements, along with further legislative updates to exclude arrangements that were not intended to be captured by these provisions.
Adrian Moss is a trusts and tax director and James Amico is a tax and accounts manager at Penningtons Manches Cooper LLP
