The demise of Trusts has been overstated
There has been much written in the media of late saying that the future of Trusts is in question with the advent of a new requirement that they register with the Trust Registration Service, their details will become a matter of public record, and that even life assurance policies written in trust would be subject to the new regime. Nothing could be further from the truth!
Background
Both HMRC and the Treasury recognise that trusts are an integral part of the UK legal system affecting personal, commercial and public life in the UK.* There is however concern that some trusts may be used for money laundering of criminal or terrorist funds, as a result of it not being clear who are the trustees or underlying beneficiaries. The 5th Money Laundering Directive and Trust Registration Service (TRS) are being introduced to prevent trusts being used for money laundering purposes, not to restrict the legitimate use of trusts in financial planning.
What will the new legislation mean in practice?
The legislation has not yet been finalised, but the Technical Consultation Document published on 24th January 2020 gives some clear guidance.
The following types of trusts will be excluded from registration requirements as the money laundering opportunities thy present are minimal:
Statutory trusts, such as those arising on intestacy or necessary solely for the purpose of jointly owning a home.
Trusts arising by virtue of ownership of an asset such as joint bank account.
Bare trusts.
Maintenance fund trusts for historic buildings.
Approved share option and profit-sharing schemes.
Vulnerable beneficiary trusts.
Personal injury trusts.
Trusts consisting solely of a policy which is a pure protection policy and payment is not made until the death or terminal illness of the insured.
Pension scheme trusts that are registered with HMRC on ‘Pension Schemes Online’ or ‘Manage and Register Pension Scheme’.
Charitable trusts.
Trusts already registered in another EU member state.
Existing trusts falling outside these definitions will have to register with the TRS by 10th March 2022, detailing who the beneficial owners are; the settlors, trustees and beneficiaries (this is likely to comprise name, address, date of birth, and national insurance number). For trusts set up after 10th March 2022, they will have to register with the TRS within 30 days.
Any changes to the beneficial owners of the trusts will have to be notified within 30 days, or may be subject to a £100 penalty notice.
Confidentiality
Contrary to what some commentators were suggesting, the beneficial owners of trusts will not be a matter of public record via the TRS. As you would expect, the records will be available to law enforcement agencies to combat money laundering and terrorist financing.
Two additional categories of requests for information have been introduced under the 5th Money Laundering Directive. First, legitimate interest requests can be made where there is evidence of money laundering or terrorist financing, but these will be subject to rigorous examination before information is released. Second, third country requests can be made where the trust holds a controlling interest in a non-EEA legal entity (typically company). These will be subject to the TRS checking that the request is reasonable and within the objectives of the Directive.
Summary
These new rules are neither unexpected, nor unreasonable given the modern world that we live in, and the global crack-down on money laundering, terrorism and tax evasion.
Trusts are an extremely effective way of passing wealth between generations with safeguards in place, ensuring that the right people benefit as intended by the Settlor (donor). Trusts are subject to taxation but can often be used to manage or mitigate tax legitimately, while also protecting assets from creditors, estranged spouses or other ne’er-do-wells. These purposes are the very reasons that assets were placed into trust by Knights going to fight in the Crusades in the 12th Century.
Trusts have been an integral part of the UK legal system for centuries, and will continue to be so in the future. In a future blog, we will set out some of the financial planning benefits of trusts and how they can be used today.
*Source: HM Revenue & Customs/HM Treasury – Fifth Money Laundering Directive and Trust Registration Service, technical consultation document: 24 January 2020.
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