After a lengthy consultation, the government's final proposals for the expansion of the UK Trust Register under the Fifth Money Laundering Directive ("5MLD") were finally laid before Parliament last week. There will now be an opportunity for objections to be raised and, potentially, for the statutory instrument to be annulled (though this is very rare in practice). If a motion to annul is not agreed, the regulations will come into effect as drafted.
Whilst there have been a few welcome changes to certain requirements proposed at the start of the consultation, the new regulations are likely to produce some questionable results. This note focuses on the position of non-UK resident trustees, including the information which will need to be registered, whether such information can be publicly accessed, and the key dates to consider in this context.
Which trusts are caught?
Under the Fourth Money Laundering Directive ("4MLD"), trusts which incurred a UK tax charge were required to register their details. The 5MLD expands the scope of trusts required to register, with the effect that certain trusts which are not taxable in the UK are now included.
The regulations confirm that despite the changes, certain trusts will remain out of scope due to their low risk of being used for money laundering or terrorist financing. These include (non-exhaustively):
- trusts for vulnerable beneficiaries or bereaved minors;
- co-ownership trusts (where the trustees and beneficiaries are the same persons); and
- will trusts created on death that only receive assets from the estate (or trusts that only receive benefits from a life insurance policy) which are wound up within 2 years of death.
Beyond these specific exclusions, registration will now be required for certain types of trusts, even where the trustees have not incurred a UK tax charge. These are categorised under the regulations as "Type A", "Type B" and "Type C" trusts.
Where the trustees have incurred a UK tax charge, there are separate, more extensive reporting requirements to consider, whether or not the trust falls within one of the above categories. The requirements for these trusts are not covered here.
A Type A trust is a "UK trust" which is an express trust (i.e. a trust created intentionally by an act of the settlor, rather than one imposed by law) and is not an EEA registered trust (one where the beneficial information is required to be held in a central register of an EEA state other than the UK).
A "UK trust" is one where:
- a) all the trustees are resident in the UK (not relevant for non-UK resident trustees); or
- b) (i) at least one trustee is resident in the UK, and (ii) the settlor was resident and domiciled in the UK at the time the trust was set up, or when the settlor added funds to the trust.
Note that the use of "and" (underlined above) means that where the settlor is UK domiciled at the date the trust is settled / funds were added, but not UK resident (or vice versa), the trust will not be a UK trust for the purpose of the regulations and will therefore not be a Type A trust. The concept of deemed domicile for tax purposes is not included here, so a UK domicile under general law is required. Similarly, if both conditions above are met, but the trust does not have a UK resident trustee, it will also not fall within this category.
A Type B trust is a non-UK trust (i.e. not a "UK trust"), which is an express trust and not an EEA registered trust, with at least one UK resident trustee, where the trustees:
- enter into a business relationship with a UK service provider (lawyers, accountants, investment managers etc.); or
- acquire an interest in land in the UK.
The regulations provide that a business relationship means a business, professional or commercial relationship that arises out professional activities, and that is expected to have "an element of duration" at the outset. The government has indicated that this will be the case if the relationship is expected to last for more than 12 months. Importantly, the service provider must be acting in the course of business in the UK. Engaging professional advisers based and carrying on business outside of the UK will not trigger a registration requirement under this category.
The regulations define "acquiring an interest in land" as where at least one of the trustees becomes registered on the legal title as the proprietor of a freehold interest or a lease granted for an initial term of more than seven years. Bizarrely, there is no requirement to register where beneficial ownership is acquired without legal title. The result is that a trust that would otherwise qualify as a Type B trust will not have to register if, on a purchase of land, the legal title is transferred to a nominee.
If an overseas entity is used to hold the legal title then under the current proposals for the Registration of Overseas Entities Bill ("ROEB"), information on the beneficial ownership of that entity will need to be provided to Companies House. However, where a non-taxable non-UK trust uses an overseas entity which it does not own (or exercise significant influence or control over), there will be no registration requirement under the Trust Register, nor a requirement for its personal/corporate details to be registered as the beneficial owner of that entity under the ROEB.
The use of the present tense in the regulations, i.e. "enter" and "acquire" rather than "have entered" and "have acquired", means that trustees who have already engaged a UK service provider or acquired an interest in land, will not be required to register as a result of this pre-existing interest or business relationship. A UK service provider engagement or UK land acquisition will need to occur after the rules have come into force to trigger a registration requirement (see "Timing" below).
The final category of trusts which must be registered despite not incurring a UK tax liability are Type C trusts. This is a non-UK trust, which is an express trust with no UK resident trustees, where the trustees acquire an interest in UK land (i.e. where at least one trustee becomes registered on the legal title as the proprietor of a freehold interest or a lease granted for an initial term of more than seven years).
Acquiring an interest in UK land will therefore trigger a registration requirement, regardless of whether or not the trust has a UK resident trustee. Under previous proposals during the consultation process, this was also the case for trusts which enter into a business relationship with UK service providers. However, the overwhelming feedback from practitioners was that that trustees of non-EEA trusts would be discouraged from using UK-based advisers, due to the additional costs of registering and potential loss of confidentiality as a result. The UK government was receptive to this and agreed that trusts should not be required to register if their only connection to the UK is through a service provider.
Where an acquisition of UK land is the only connection to the UK, registration will still be required, though concessions have been made in respect of the information required and public access (discussed below).
Which information must be registered?
It will be welcome news to non-UK resident trustees that much of the information required for trusts which incur a UK tax charge is not required in respect of those which do not. Perhaps the most surprising difference is that whilst taxable trusts are required to provide extensive information on the trust itself (such as the trust's name, a statement of accounts, and details of any legal, financial or tax advisers), none of this information is required in respect of the non-taxable trusts that are now within scope.
One would imagine that some information about the trust itself would be necessary for identification purposes, but this is certainly not clear from the regulations. It would be interesting to see how HMRC would deal with an application in which, instead of providing the name of the trust, the trustees simply referred to it as "Trust X". Under the regulations as drafted, they appear to be within their rights to do so. Whether HMRC would agree with this is another matter; it is difficult to see how an assessment could be made as to whether a person requesting access to information has a legitimate interest in the beneficial ownership of a trust (see below), where the trust cannot be identified by its name on the register.
The information which is required in respect of Type A, B and C trusts that do not incur a UK tax charge is set out below. If any of the information provided changes, the trustees must notify HMRC of the change and the date it occurred within 30 days of becoming aware of the change.
(i) Beneficial owners who are individuals
The following information is required in respect of individual beneficial owners of the trust. These include the following:
- individuals who have control over the trust (such as protectors); and
Information is also required in respect of any individuals who are referred to as a potential beneficiary in a document from the settlor relating to the trust, such as a letter of wishes. Clearly, this is a marked change from the traditional approach that the contents of such documents are to be kept private, and this should be borne in mind when these are drafted.
The general rule that information must be provided regarding beneficiaries is qualified where beneficiaries fall within a class and not all such beneficiaries have been determined (for example, where the class is defined as descendants of the settlor, and further descendants may be born within the trust period). In such cases, the information required to be provided under the regulations is limited to a description of the class.
The guidance issued by HMRC states that where a member of an undetermined class of beneficiaries receives a benefit, information on that individual must then be registered. Whilst this does not appear to be consistent with the regulations, trustees may choose to exercise caution and follow HMRC's interpretation to avoid suffering sanctions for non-compliance.
The information which needs to be provided in respect of each named individual is the following:
- full name;
- month and year of birth;
- country of residence;
- nationality; and
- nature and extent of the individual's beneficial interest.
(ii) Beneficial owners who are legal entities
Where any of the beneficial owners listed above are legal entities, the following information must be provided in respect of each:
- corporate or firm name;
- registered or principal office of the legal entity; and
- nature of the entity's role in relation to the trust.
(iii) Controlling interests in third country entities
Further information will be required where the trustees have a controlling interest in a third country entity (a body corporate, partnership or other entity governed by a non-EEA law). This could include an underlying BVI company, for example, or a Swiss GmbH. The trust will have a controlling interest where, broadly, it holds 50% or more of the shares or voting rights in (or exercises significant influence or control over) that entity.
Provided the entity is not required to register on a corporate beneficial ownership register in an EU member state, the trustee will be required to provide the following information in relation to it:
- corporate or firm name;
- country or territory by whose law it is governed; and
- the registered or principal office.
Where the trustees acquire an interest after providing the information at (i) and (ii) above, a 30 day deadline will apply from the date the interest was acquired.
When must the information be registered?
The deadlines for registration for non-taxable trusts which find themselves within scope before 9 February 2022 is 10 March 2022.
From 9 February 2022, a 30 day deadline will apply from the event triggering registration. For trusts which do not incur a UK tax liability, this could be where the trust:
- is set up;
- enters into a business relationship with a UK service provider;
- acquires an interest in UK land; or
- is not wound up within two years of death (for will trusts).
Can the information be publicly accessed?
From 10 March 2022, HMRC will be required to disclose some of the information above, held in relation to Type A and Type B trusts, to third parties who request access to it. Type C trusts will not be subject to this, so provided a trust which is not taxable in the UK has no UK resident trustees, any information which is submitted will not be publicly accessible.
The regulations provide that where a person who makes a request can demonstrate a "legitimate interest" in the beneficial ownership of a Type A or Type B trust, the information at (i) and (ii) above will be made available to them.
The general feedback to the initial proposals under the consultation was that as "legitimate interest" was not defined, this could be open to abuse (by investigative journalists, for example). These concerns have now been allayed to some extent by the final proposals, which provide that the following strict criteria must be considered in making this assessment:
- whether the person is involved in an investigation into money laundering or terrorist financing;
- whether the request is to further an investigation into a specified suspected instance of this;
- whether disclosing the information would be likely to prejudice any criminal investigations; and
- whether, based on the information provided by that person, it is reasonable to suspect the trust is being used for money laundering or terrorist financing.
There is no requirement for the legitimate interest test to be satisfied where the trustees of the trust in question have a controlling interest in a third country entity. It will therefore not apply where information is provided under (iii) above.
Thankfully, HMRC are able to withhold information in the following scenarios for all requests:
- where the beneficial owner is under 18 or lacks capacity; or
- where HMRC considers that making the information available would expose the beneficial owner to a disproportionate risk of harm (through fraud, kidnapping, blackmail , extortion, harassment, violence or intimidation).
Penalties for non-compliance
Details of the penalty regime for non-taxable trusts have not been confirmed in the regulations. During the consultation process, the following was proposed:
- For the offence of failure to register: no financial penalty, but a notification is sent to the trustee setting out their responsibilities.
- For the first offence of the failure to update details within the time limit: no financial penalty, but a notification is sent to the trustee reminding them of their obligations and the time limit for updating the register.
- For a second and each subsequent offence of a failure to update details within the time limit: a set penalty of £100 per offence.
The government has since confirmed that it intends to proceed with the regime above. However, in response to concerns that the proposed penalties would not provide an effective deterrent for those who are determined not to comply, it is now considering a separate regime where failure to meet the requirements is due to deliberate behaviour. The amount of this penalty is under consideration and further details are expected to be published in due course.
The key date from which entering a business relationship or acquiring an interest in land triggers a registration requirement will be 6 October 2020 (being 21 days after the statutory instrument was laid and assuming it is not annulled). Non-UK resident trustees who intend to engage UK service providers may wish to take advantage of this small window by doing so ahead of the deadline to ensure they remain outside of the scope of the new rules. Those who intend to acquire UK land may also consider doing the same, but should be aware that if the transaction gives rise to Stamp Duty Land Tax ("SDLT"), registration will be required in any case as a result of this liability.
Charles Russell Speechlys can advise as to whether a trust falls within the scope of the UK Trust Register and, where necessary, deal with the registration process to ensure the correct information is provided.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.