Europe doesn't understand

Trusts in the UK have taken a battering over the last decade with heavier inheritance tax (IHT) charges, the reduced numbers of children’s trusts that qualify for special tax treatment, and, more recently, the proposal to split a settlor’s IHT nil rate band.

But the latest attack comes from Europe. The most recent draft of the fourth anti-money laundering directive requires member states to establish public registers disclosing the ultimate beneficial owners of trusts in that country.

In the UK, the proposal has understandably met opposition and, frankly, disbelief. At present, there is no such register, and details of beneficiaries or other information about the trust are confidential to those who create and administer them.

As the vast majority of Europe does not use or understand trusts, the thought that it can dictate such a major and far-reaching change to running trusts in this country is a hard pill to swallow.

The directive’s provisions relating to transparency were originally aimed at establishing public registers disclosing beneficial owners of companies, a move
that is widely supported at government and professional level here. But trusts were unexpectedly included following a vote in the European parliament on 20 February 2014.

The UK government has since voiced its opposition and, I understand, is seeking to water down the trust provisions, perhaps by limiting disclosure to trusts with financial assets and/or dealing with the issue via the UK’s existing trust reporting obligations and automatic tax information exchange agreements.

I can see why some would question whether public registers would be such a bad move for trusts in the UK. In my view, it would be mainly for privacy reasons. Clients who want a discretionary trust in their will to look after generations to come, for example, quite often don’t want those younger family members to know much (if anything) about the wealth available.

Then there are the more controversial and colourful examples – trusts for mistresses and ‘illegitimate’ children – disclosure of which could
lead to family strife.

The proposals are also criticised for being disproportionate. Their purpose is combating tax evasion, money laundering and other financial crime, which I fully accept. But are these measures needed for trusts?

Most trusts are now heavily taxed and arguably do not make an attractive vehicle for criminal activity. The vast majority of UK trusts are low risk and set up for genuine, worthwhile reasons.

The EU, where only two of the 28 states use trusts, do not understand this structuring and is, wrongly, suspicious. I fear that the UK is only one voice in the crowd and will have an uphill battle to convince them otherwise.

If these proposals go through and trustees
have to disclose information on trust beneficiaries
(as I understand it, anyone with an interest in 25 per cent or more of the trust’s capital), what could be
the impact?

It is likely that some existing trusts will be wound up, particularly smaller ones and those with real confidentiality concerns. And settlors will think twice about setting up new trusts because of the privacy issues and cost. Some may see this as the thin end of the wedge, fearing the next challenge. We may well see a greater take-up or, at least interest in, alternative vehicles: family limited partnerships, limited liability partnerships and offshore trusts.

I understand that the European parliament will deliberate over the draft directive with the European Commission and Council of Ministers later this year. I only hope that the UK can make some headway with its negotiations.

It’s bad enough telling clients about the IHT cost of setting up a trust. I’m not looking forward to telling them that they will have to disclose their family’s names on a public register.

Fay Copeland is partner and head of private client at Wedlake Bell

She writes the regular comment on inheritance in Private Client Adviser