Trust Registration Service expansion: some uncertainties and randomness?
John Bunker explores the precariousness of the recent expansion of the Trust Registration Service.
Private client practitioners face a complex new compliance element for the Fifth Money Laundering Directive (5 MLD), after the Trust Registration Service (TRS) expansion went live on 1 September, and includes some seemingly arbitrary rules.
With all express trusts required to register on TRS, even though not taxable, unless within the exclusions in Sch 3A of the Regulations those exclusions are critical but at times appear to draw random lines. I hope to shed some light on that line-drawing.
The big news for practitioners, is that we can now register all those “registerable express trusts” we’ve been waiting to register since the regulations came into effect about a year ago, on 6 October 2020. We have 12 months, to the new deadline of 1 September 2022, to register not only current “express trusts” which are not “excluded”, but also to decide what to do with all the historic trusts we have set up that need registration (see further below).
Thereafter, there will be a 90-day period (helpfully extended from 30 days) to register new trusts. Good practice would have been to keep records of all the trusts in the last year that will need registration, while the IT for the TRS was adapted and a new HMRC Manual was developed.
A registerable express trust may develop into a “registerable taxable trust”, at any time, if any of the five taxes – inheritance tax, capital gains tax, income tax, stamp duty reserve tax or stamp duty land tax (or land transaction tax in Wales or land and buildings transaction tax in Scotland) become payable. If it does, it changes to the different detailed rules for registerable taxable trusts – even if it was only a one-off tax payment.
Guidance from HMRC
The first guidance, including on the scope of the exclusions, was outlined by on the gov.uk website, but it is all aimed at the layman, so is not suitable for practitioners. For more detailed, technical information and guidance, practitioners can refer to the new Trust Registration Service Manual (TRSM). The TRSM embraces both forms of trust on the TRS, and also “complex estates” which need to register there, but has only been developed recently for this expansion.
The TRSM leaves quite a few questions unanswered, particularly on the interpretation of what is “excluded” by Sch 3A. For example, regarding co-ownership of property, where the scope of paragraph 9 of Sch 3A is very narrow, bringing within the scope for registration any joint ownership of land where the legal and beneficial owners are different.
Many trusts of land arise on death, where there is a two-year grace period when registration is not needed. But there are further issues, such as about the timing of buying a new property after the one held at death is sold. HMRC is still considering representations that professional bodies have raised (including my own contributions), so we hope to have amendments to the TRSM to clarify more points soon.
Life policy trusts
Life policy trusts are covered in paragraph 4, of Sch 3A, and also paragraph 8 (which deals with trusts holding the proceeds of a policy under paragraph 4 during the two years after the death of a life assured). The scope of the exclusion in paragraph 4 is very narrow, referring to proceeds only being payable in the event of death or very limited circumstances, which raised a question about policies which had any surrender value.
HMRC on 12 July made a helpful announcement (which will hopefully soon appear in the TRSM). It confirmed that “the exclusion in Sch3A(4) can be properly interpreted as including trusts holding policies which have surrender values, and that those trusts would remain excluded until such time as the policy is actually surrendered. It follows from this that pay-outs received from such policies on death would continue to benefit from the exclusion at Sch3A(8). HMRC will include this position in the next iteration of the Trust Registration Service (TRS) manual.”
This stretches the interpretation of the words in the text, but we are grateful for anything that makes it easier when the scope of the exclusion is so narrow. While confirmation is awaited, and the “line drawing” is hard here, it is likely that any life policy that has a significant investment element, such as one involving an investment bond, would not be excluded. It really only excludes policies that mainly provide protection in the event of death or serious illness etc, and if that happens to have a surrender value, it’s ok.
It is important to remember that these are anti-money laundering provisions, rather than tax ones. Bare trusts are an example where you might see a sledgehammer cracking a nut, but we must remember that HMRC see bare trusts as a potential risk in anti-money laundering (AML) terms. The regulations can’t distinguish between the innocent bare trust for a minor in a will and the potentially problematic nominee arrangement for holding assets – which could disguise true ownership. So, whereas bare trusts are a ’look through’ for tax purposes, they are a potential problem for AML and TRS.
Another area of concern is the digital handshake. A trustee must create a separate government gateway account for each trust of which they are a trustee. When setting up the account the trustee must match the exact details provided in the trust register. If the details do not match, or the personal details of the trustee in the HMRC systems do not match that on the trust register, then access to the trust can’t be claimed. The annual updates or changes to the trust can’t then be made. This is not a straightforward process to follow and is particularly difficult for those who are digitally challenged.
Questions remain about whether a trust which has already been wound up, even before you could register it on the TRS, but after 6 October 2020, needs to be registered and then immediately de-registered. This illustrates the really bizarre situation of clients paying for something that seemingly has no purpose whatsoever. Or perhaps clients not being prepared to pay, as the trust has been wound up, and then what is the position of trustees without any funds?
Many concerns have been raised with HMRC about the position of advisers who have set up trusts some time ago, often long before all this took effect, who have no funds with which to meet the costs of registering on TRS. In many cases there may be no current contact, or ongoing file, with the trustees or beneficiaries of the trust. What is the position where you acted but were not a trustee? What difference does it make where you are a trustee but have no trust funds? Or maybe a former partner of the firm was a trustee? All firms of advisers need to make decisions, as soon as possible, about what they will do with these thorny issues.
HMRC say there is a legal obligation to register these trusts, whether the trust has funds or not, but what is the sanction for failure to register? Initially penalties will be a relatively ‘light touch’ and I’m sure many advisers can hear some clients saying “so why should I pay you to do this then?!” There are no easy answers here, but the year in which to do this has now started running, and I would encourage all firms who set up trusts caught by the new rules to consider this without delay, to decide their policy.
I assure you all these points have been made in meetings with HMRC and their hands have been tied by the understandable policy of not wanting Britain to be seen as a soft touch for money laundering. The seemingly random unfairness of the line drawn, between the trusts excluded and not, is perhaps inevitable but is still hard in practice.
John Bunker is a consultant solicitor at Irwin Mitchell LLP irwinmitchell.com