Through the looking glass - disclosure on Trusts
This article was prepared by James Quarmby, head of private wealth at Stephenson Harwood
In our first edition after the election, we return to the issue of the disclosure of trusts, as the unstoppable transparency juggernaut continues to roll on. Any hopes that the government would be too busy dealing with Brexit to be able to pass new legislation has been dashed - the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 were passed on 22 June 2017 and took effect on 26 June.
I must first lodge a complaint about the increasingly long-winded names of legislation these days, this one in particular. It doesn’t even translate into a nice acronym: the MLTFTF (IP) Regulations is a real tongue twister.
Anyway, the 'Regulations' (as I will call them) require a register of beneficial ownership of trusts to be created and maintained by HMRC. This will be, following another trend, an online register; although HMRC announced that it is not yet ready for use. We are told it should be ready "shortly". I've heard that before.
Blame the EU
The whole discussion about trust disclosure started in earnest at the EU where our continental cousins, most of whom have little understanding of how trusts work, decided that it would be a good idea to have a public register of all trusts within the EU. This formed part of the EU's 4th Money Laundering Directive (4MLD). Leaving aside for one moment whether the UK will be part of the EU from 2019, the UK government has decided that a trust register is a good idea, but perhaps not one available to the general public. The first iteration of 4MLD did not require public registers, but the latest version does, meaning that the UK will have implemented a superseded version of the EU rules.
Incidentally, another EU member state, France, has introduced a public register but then had to close it down because of a challenge by a French resident on human rights/privacy grounds. The claimant in that case argued, not unreasonably, that having her family's financial arrangements splashed all over the internet was not respectful of her human right to privacy. The case was heard by the French Constitutional Court which, so far, has agreed with the claimant.
It does seem odd that we now have a situation where one powerful European body, the EU, is pressing heavily for legislation which will probably breach the rules of another powerful European body, the European Court of Human Rights. It's Brussels vs Strasbourg - I wonder who will win? There is a very good argument that forcing individuals to disclose highly confidential information about their family finances breaches Article 8 of the ECHR as well as EU data protection laws. This could get messy.
So what are the new UK Rules?
If you think this is just a problem for UK resident trustees you would be wrong – the requirement to register applies to all UK resident trustees but also to any non-UK trusts which have a UK tax liability.
To make matters worse, it would appear to be an annual obligation so that trustees must provide the information in any year in which a UK tax obligation arises for the trust in question. 'Tax obligation' is drafted widely to include income tax, CGT, IHT, SDLT/LBTT and SDRT. The obligation also appears to extend to collective investment schemes constituted as a trust.
The information to be provided remains as per the draft Regulations (see below for link) and is extensive, to include information about trustees, beneficiaries, and all assets (you could call it a real 'drains up' exercise) with the addition of the full name of any advisers who are being paid to provide legal, financial or tax advice to the trustees in relation to the trust! Quite why the name of the advisor needs to be disclosed is beyond me, but I suppose it's free advertising.
The time limits for registration are now set as 31 January 2018 or 31 January after the tax year in which the trustees were first liable to pay any of the above taxes. Thereafter, the trustees must provide an annual notification either detailing any changes or confirming that the information remains the same by 31 January each year. It is not clear whether non-UK trusts can have information removed from the register in a year in which they have no UK tax liability.
Like the PSC Register, the trustees must also keep their own record/register of beneficial ownership which must be accurate and up-to-date and in writing. All such records must be retained for 5 years after the date on which the final distribution is made from the trust and must be provided to any law enforcement authority upon request. For these purposes law enforcement authorities include HMRC, the FCA, the NCA, the SFO and the police.
You can find the Regulations here.
How does this relate to the PSC Rules?
It doesn't really, which means that you will have to learn two sets of rules. The PSC rules, which are for companies, focus on identifying 'persons of significant control' whereas the Regulations ask you to identify the 'beneficial owner' (BO) of a trust.
Further, the PSC register is totally public, whereas the trust register will be maintained by HMRC and it is shared only with authorised bodies.
What's really fun about this is that if you have a UK company owned by a trust (whether a UK trust or an offshore trust) then you have to apply the PSC rules to the trust, in order to work out who the PSC is in relation to the company and then apply the BO rules to the trust if you have to register under the Regulations. If you like filling in forms then you will be very happy.
Who is a beneficial owner?
I could be pedantic at this point and say that it is not possible to 'own' a trust but the government doesn’t seem to appreciate this nuance and it has provided a definition of BO which includes the settlor, the trustees, any beneficiaries (however remote) and anyone who can 'control' the trust. The latter category includes protectors and anyone else with either positive or negative powers over the trust. Incidentally, the rules also expressly catch foundations or anything else that looks like a trust.
What next?
The Regulations are now law, which means that if you are a professional trustee then you should be reviewing all your trusts to identify which will be required to register. For existing trusts this must be done by 31 January 2018 and for new trusts you have to do it by 31 January following the tax year of creation. A failure to register is a criminal offence, which should make compliance officers in trust companies even more stressed than usual.
For the hundreds of thousands of lay trustees in the UK, I expect that most of them will be entirely ignorant of these new rules, as their introduction was not exactly front page news. I have complained before about this government's tendency to introduce increasingly Draconian legislation and one must wonder what purpose it will serve to potentially criminalise huge numbers of otherwise totally innocent individuals.
As you will appreciate, this is a bit of a minefield and should you get lost please give Emily or me a call and we can help you out.
KEY CONTACTS
James Quarmby
Partner
T: +44 20 7809 2364
Emily Osborne
Senior associate
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