Imagine a situation where parents of two young boys are tragically killed in a car accident. The parents have taken steps to ensure that if any such tragedy occurred, their sons would be well looked after and so they have Wills with sufficient powers to enable their chosen trustees to manage their assets until such a time as the boys are old enough to take control of their inheritance. The boys’ parents ran a successful business and the family have a comfortable home in Hampstead. As the family were in the wine business, the cellar is well stocked with rare and valuable bottles. The family also enjoyed fine art and there are some very nice pieces of artwork on the walls, some inherited and some bought more recently.
The trustees obviously want to ensure that they fulfil their duties correctly, and take advice as to what they need to do.
All this is a world away from Panamanian foundations, trusts established in exotic parts of the world (like the Isle of Man!), BVI companies etc. and even further away from the shady offshore world of downright deliberate tax evasion and laundering of proceeds of crime. However, as the trustees are about to find out, the international and domestic initiatives which have been put in place to tackle the twin evils of tax evasion and proceeds of crime being laundered through complex offshore transactions have caught private family financial arrangements in the cross fire. In the current climate, to insist on financial privacy is treated as tantamount to giving a carte blanche to tax evaders and terrorist money launderers. We are not quite there yet, but equally we are not far off from the day where all details of the trustees and the beneficiaries and of all assets (and their value) held by our trustees for the two sons will be kept on a publicly searchable register, for all to see.
The Trust Register
The trust register is a requirement of Article 31 of the Fourth Money Laundering Directive (2015/849/EU) (MLD4). It requires two things:
- that HMRC maintains a central register of trusts; and
- all trustees maintain a register in writing containing pretty comprehensive information about the trust, its assets and its beneficiaries and all individuals with control over the trust.
Not surprisingly, most interest has been centred on the requirement to provide HMRC with the required information for inclusion on a central register (which replaces the old Form 41G which informed HMRC of the creation of a new trust), but it must not be forgotten that all trustees must also ensure that they hold a register in writing containing information required by MLD4 regulations.
The requirement to pass the information on to HMRC is limited to those trusts which are taxable, by which is meant any trusts in the relevant year which are liable to pay income, capital gains, inheritance or stamp duty land tax in the UK as well as Scottish SDLT and stamp duty reserve tax. This means that UK trusts and non-UK trusts which have UK source income or gains fall within the definition and the information will need to be provided. The only entities to which that information can be released (for now) are law enforcement authorities namely HMRC, the Financial Conduct Authority, the National Crime Agency, certain police bodies and the Serious Fraud Office.
The trustees have an obligation to keep the information up to date and to notify HMRC of any changes to it. In addition, the trustee has the obligation to inform individuals with whom they enter into a business relationship that they will do so as trustees and on request provide them with information identifying all the beneficial owners of the trust. The obligation to update changes to that information equally applies.
Trustees must maintain accurate and up to date records in writing of the following:
All the beneficial owners of the trust. This means:
(a) the settlor;
(b) the trustees;
(c) the beneficiaries;
(d) the class of persons in whose main interests the trusts are set up or operates; or
(e) any individual who has control over the trust. Control over the trust means power to lend, advance or pay or apply trust property or vary or terminate the trust and also includes the ability to add or remove persons as beneficiaries or appoint or remove trustees, or be able to
withhold consent to or veto the exercise of any of the above powers.
The information that needs to be held in respect of individual beneficiaries is extensive and includes:
- the individual’s full name, the individual’s National Insurance Number or unique taxpayer reference if any;
- if there is no National Insurance Number then the individual’s usual residential address or passport number or identification card number with the country of issue and the expiry date of the passport or identification card or if the individual does not have a passport or identification card the equivalent form of identification;
- the individual’s date of birth; and
- the nature of the individual’s role in relation to the trust
Information to be provided about the trust
The information the trustees must provide about the trust consists of:
- the full name of the trust;
- the date on which the trust was set up;
- the accounts for the trust, describing the trust assets and identifying the value of each category of the trust assets at the date on which the information is first provided to HMRC (including the address of any property held by the trust);
- the country where the trust is considered to be resident for tax;
- details of legal and accountancy providers to the trust.
As with many of these initiatives, they are drafted by individuals who do not understand trusts. The practical impact of what might seem to be reasonable requests for information to help arm our Revenue collectors and law enforcement agencies with sufficient information to catch the bad guys, often translates to a disproportionate burden on entirely innocent family arrangements.
As an example, the need to maintain information on the values of trust assets seems reasonable because wouldn’t most trustees maintain accounts?
Yes, most well run trusts will have detailed trust accounts indicating the income received, profit made on sale of assets and distributions paid out to beneficiaries. The market value of assets which are not intended to be traded is not commonly kept track of and therefore the regulations impose on trustees and beneficiaries and additional burden to obtain values it would seem for no other purpose than to create a paper trail of values.
In its recently released guidance, HMRC says “To keep administrative burdens on trustees to a minimum, we are not expecting formal valuation…we would expect trustees acting within their professional duties to provide a good estimate of the market value of the assets”. While formal valuation may not be a requirement, trustees may be well advised to instruct reputable valuers or otherwise may be faced with a more difficult argument at some point in the future when the item in question is sold if their ‘guestimate’ proves misleading when professional valuation is needed to establish either base cost or market value if the asset is distributed to the beneficiary. The valuation issues are particularly vexed in the world of valuations of private company shares as well as property and items of fine art. In our example above, the Will Trust will have a wine collection, fine art and the value of the property itself to value. In this instance they will need to obtain formal valuations in any event in the course of the administration of the parents’ estate, but for many trusts, particularly a trust to hold artwork or shares in a private company, valuation of such assets even on an informal basis is no easy matter.
Although the regulations require more detailed valuation information on the assets of the trust than were ever required by the old Form 41G, HMRC has confirmed that where existing trusts are being registered on the central register and have previously submitted a Form 41G, the trustees need only note ‘already notified’ on the register.
Query whether this approach is enough to discharge the trustees’ obligations under the regulations and it will be prudent for existing trusts or trusts which have not yet suffered a UK taxable event to maintain trust accounts which note the value of each class of trust assets.
HMRC has issued guidance which states that where living members of a class of beneficiaries can be identified by name, their details should be recorded, whether or not they receive or are likely to receive any distributions. This is arguably contrary to the regulations where it seems clear that only the class of beneficiaries need be noted.
Controversially, included in the list of beneficiaries is any other individual referred to as a potential beneficiary in a document from the settlor relating to the trust such as a letter of wishes. This is potentially problematic as letters of wishes are private non-legal letters from the settlor, confidential to the trustees and may include individuals that either for their own benefit or because of the circumstances of the family as a whole, the settlor did not want any to be named on the face of Will which becomes a public document once the testator has died. They may also only be named because they are to benefit in the event of some remote set of circumstances (like the unexpected deaths of nearer relatives.)
It is also problematic because a letter of wishes may refer to a wide range of individuals none of whom have any standing in law to be formally connected to the trust until such a time as the trustees choose to exercise their power. There is guidance which would suggest that only those who are very likely to benefit should be included but again that requires the trustees to exercise a judgement and it would not appear to be what is required in the regulations.
The requirement to report the details of legal and accountancy advisers to the trust is also a new departure and is most probably linked to the fact that HMRC now has access to a data mining software which is sophisticated enough to pictorially generate spider web connections between each individual, company, and trust, and it might appear adviser with the intention of spotting persistent or abusive advice leading to tax loss.
Hand in hand with the ever increasing obligation to maintain records and collect information on beneficial owners in order to satisfy the trend towards transparency, comes the obligations on individuals who hold that information to treat it and guard it carefully in accordance with the Data Protection Regulations. Trustees who are paid to perform that office must retain the records for a period of five years after the date for which the final distribution is made into or from the trust and to make arrangement for those records to be deleted at that period unless there is consent that the information be retained. In an ideal world, all relevant information would be dealt with as required but it is practical good sense for trustees obtain consents to retain information at the same time as collecting the information to guard against accidental retention beyond the permitted period.
As with all regimes intended to prevent tax evasion and money laundering, the failure to comply with the trust register has serious consequence.
Civil sanctions include penalties and statements of censure and individuals who are officers of a trustee (directors of a trust company) who are knowingly concerned of contravention of the requirements are also subject to the same sanctions as an individual trustee. Criminal sanctions including imprisonment for up to two years, a fine or both are also a possibility particularly if along with contravention of a requirement it prejudices investigation or provides false or misleading information.
When do trustees have to comply with their obligations?
The short answer is that the regulations are already in force as regards trustees’ obligations to maintain a register in writing. The obligations to provide HMRC with the information needed to be maintained on the central register is a little bit more problematic at the moment. Trustees of a taxable relevant trust must provide the information on or before 31 January 2018 or 31 January after the tax year in which the trustees were first liable to pay taxes. New (i.e. not previously registered under the old system) trust registrations must be complete by 5 December 2017.
Returning to our original example, the Trustees of the two boys who were left orphaned by their parents’ death now find themselves in a position of complying with the obligations of the trust register. Identifying the details of beneficiaries you would have thought would be relatively straightforward in this case. However, in this case the class of beneficiaries include the parents’ siblings and their children - a class of 20 individuals. A decision needs to be made as to whether the information of all 20 people who can be identified by name needs to be collected and maintained. Oh yes, and curated and disposed of in accordance with the Data Protection Act. HMRC seems to think so.
Trust Register and Financial Privacy
The slightly more sinister side of the trust register (if you choose to view financial privacy as important) is that it would appear to be a first step on a road to creating a register which is publicly searchable in just the same way as the financial affairs of companies and the personal details of the individuals who own those companies are freely available to the public. This might seem far fetched but on 5 July 2016 the European Commission published a proposal for a new money laundering directive (MLD5) to amend MLD4 which included a proposal to create public access to beneficial ownership registers which would include trust registers. The government currently states that it will not address issues arising from MLD5 until MLD5 has been formally adopted and come into force. The Labour party manifesto, however, contains the following pledge “Labour will act decisively on tax havens, introducing strict standards of transparency for crown dependencies and overseas territories, including a public register of owners, directors, major shareholders and beneficial owners for all companies and trusts.”
We already face a similar proposal in a slightly different guise under the MiFID II regulations which, on the face of it, are meant to streamline the due diligence requirements when transacting with financial intermediaries in that each entity provides the information needed to satisfy anti-money laundering due diligence and that information is recorded on the central register and instead of providing copy documents, the entity provides its LEI number. In order to obtain an LEI number, the trustees are currently requested to send similar information to the trust register but also a copy of trust document which most professional trustees are currently redacting. This register is publicly searchable although only limited information on each trust currently is available. However, there are proposals to expand the searchable information from category 1 information (name and addresses of trustees) to category 2 information which would have much wider information about the beneficiaries etc.
So to return to our example, in the name of preventing tax evasion and money laundering, we may be facing a dystopian future where the personal and sensitive financial information of very ordinary people can be easily accessed by nosy neighbours via Google.