The Fourth Money Laundering Directive ((EU) 2015/849) (MLD4) was implemented in the United Kingdom as a result of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulation 2017 (SI 2017/692). In order to fulfil the requirements of MLD4, HM Revenue & Customs (HMRC) introduced the Trust Registration Service (TRS) to help combat money laundering and terrorist financing in the United Kingdom. Because of further European Directives, the TRS has now been extended with wide-reaching consequences. Read on for a discussion of who is affected and key implications.
What Is the Trust Registration Service?
The TRS is an online portal which provides certain trustees and personal representatives with a relatively user-friendly way to satisfy their registration obligations with HMRC. Under MLD4, only specified express trusts with UK tax consequences or “complex estates” needed to be registered. However, the introduction of the Fifth Money Laundering Directive ((EU) 2018/843) (MLD5), which came into effect on 6 October 2020 and aims to reinforce the United Kingdom’s leading money laundering regime, has tremendously broadened this scope. Now, all UK trusts (both express and implied) and “complex estates” must be registered, aside from the small group of identified exceptions.
HMRC has stated that the TRS has a dual purpose:
To provide a system through which a unique taxpayer reference can be generated
To provide a system to capture details in a bid to prevent terrorist financing.
Which Trusts Must Be Registered?
Registration on the TRS is no longer limited to trusts subject to some form of UK tax. Now, all implied trusts with a tax liability and UK resident express (i.e., those in writing) must be registered. This includes common forms of trusts, such as discretionary trusts, interest in possession trusts and bare trusts.
Non-UK trusts must also register in certain circumstances, such as the following:
If a non-UK trust acquires an interest in UK land after 6 October 2020 and the trustees are listed as the legal owners at HM Land Registry
If a non-UK trust has a UK trustee and the trust enters into a business relationship (thought to be longer than 12 months) with a UK service provider (i.e., solicitor, accountant, investment manager).
Initially, it was thought that all non-UK trusts engaging a UK service provider may need to register on the TRS. However, the Government helpfully clarified in its July 2020 consultation response that registration is only triggered if a trustee resident in the United Kingdom is acting. This will not affect the tax residency classification of the trust itself.
This extension will, however, include some unexpected additions to the types of trust obliged to register on the TRS:
Bare trusts, where the beneficial and legal owner are not the same, must register, including the common instances where a parent holds property on trust for the benefit of a child, or where one spouse holds a property for the benefit of themselves and their spouse.
Whilst it has been confirmed that trusts holding the benefit of life policies which only pay out on death, illness or disability will not have to register, those holding a policy which can be surrendered at any time likely must register.
The personal representatives of “complex estates” must also register the estate on the TRS. A “complex estate” is defined as one where the total tax liability for the administration period is greater than £10,000, the gross estate is valued at more than £2.5 million, or the value of assets sold in any given tax year is in excess of £500,000. Registration is required to obtain the Unique Taxpayer Reference and in any event must be completed by 5 October in the subsequent tax year after the triggering event in which tax becomes payable.
Key exceptions to the requirement to register with the TRS include:
UK charitable trusts and pension schemes which are already regulated by various bodies. If, for example, a pension scheme is unregulated, then it will be required to register with the TRS.
Non-UK trusts, which have already been required to register with a similar scheme abroad (i.e., an EU Member State).
Trusts arising on death (i.e., under an individual’s will), which are wound-up within two years of the date of death. If the trusts are in existence for longer than this period, registration will be required. Notably, trusts arising under the statutory intestacy rules (i.e., when there is no will) do not need to be registered.
Trusts of joint ownership, provided the legal and beneficial owners are the same.
Pilot trusts and trusts holding less than £100 which were in existence before 6 October 2020.
Greater Administrative and Compliance Burden
Widening the scope for registration with the TRS has significantly increased the administrative and compliance burden placed on trustees and personal representatives, many of whom are lay individuals and may be unaware of their new duties.
For example, within the Trusts and Estates August 2020 newsletter, HMRC advised that it prefers to be notified via the TRS when an administration period of a complex estate has come to an end, although this is not compulsory. This has been confirmed to various professional bodies. However, trusts coming to an end after 28 August 2020 must be reported via the TRS; written notification will no longer be accepted.
HMRC seems to recognise this greater encumbrance and has proposed “nudge letters” and small fines, initially of £100, for non-compliance.
There is a vast amount of personal information which must be provided when registering a trust or complex estate. Trusts which are chargeable to UK tax will have to divulge even greater detail than those trusts which are not liable.
Under MLD4, the parties able to see this information were restricted to law enforcement agencies. MLD5 has extended this to include “third country entities”, “obliged entities” (entering into a business relationship with a registered trust) and third parties with a “legitimate interest”. Although “legitimate interest” is not defined, HMRC has set out narrowly defined criteria for granting access, primarily in relation to assisting with money laundering or other criminal investigations. This will come as a relief to many settlors, beneficiaries and trustees.
Specifically in relation to non-UK trusts, information may become part of the public domain only where the trust has acquired UK land or where a non-UK trust engages a UK service provider and there is at least one UK trustee.
The new version of the TRS portal will not be available until late 2021, so for now, registration of UK taxable trusts must proceed using the existing portal. The deadline for registration of all UK and non-UK trusts caught by MLD5 will be summer 2022. This gives trustees and personal representatives time to identify whether registration is required and gather the relevant information needed for registration.