The Trust Registration Service (TRS) opened on the September 1, 2021, for registrations of non-taxable trusts which were brought into scope of the Trust Register by the requirements of 5MLD. Since then, it has been reported that only around 150,000 of the estimated one million trusts affected by the rule changes have been registered.
With a deadline of September 1, 2022, to get all UK trusts, and some non-UK trusts, in existence at October 6, 2020, on the register (unless specifically excluded), trust advisers will have their work cut out in the next few months.
Non-taxable trusts are my short hand for the term registerable express trusts used in HMRC’s manual. Prior to October 6, 2020, only UK trusts (and non-UK trusts with UK assets) that paid certain UK taxes needed to be on the register.
Although some additional information is now required for the taxable trusts which have already been registered, the majority of work at this stage is likely to be registering these non-taxable trusts for the first time. There are three stages to this process – identifying the trust, checking if it is on the exclusions list and, if not, the registration itself.
One of the major challenges in identifying non-taxable trusts is that, since they don’t pay tax, they may not be monitored or actively managed, so it could require a trawl through firm archives to identify and dust off long-forgotten trusts. HMRC has a limited budget for promoting the existence of the new rules, and very many trustees may not even appreciate that they are trustees.
A further challenge is the requirement to look back and register any trusts which have been wound up since October 6, 2020. Even if a registerable trust closed before September 1, 2022, the fact it was in existence at October 6, 2020, means that it needs to go on the register –and then immediately be de-registered. This is not a welcome position, but HMRC were unable to offer any concessions here and the point is now confirmed in their manual.
Once a trust has been identified, it needs to be run past the long list of exclusions to see if it needs to be registered.
In March 2022, some further exclusions for child bank accounts were added to the list, together with some tweaks to which life and retirement policies held in trust can be excluded.
Both these changes are welcome and were preannounced last year by HMRC to try and manage uncertainty until the law could be changed. HMRC has also helpfully confirmed that Junior ISAs and Child Trust Funds do not need to register.
Without the specific exclusion for bank accounts for minors, the creation of an account held in the names of one or both parents for the benefit of a child typically creates a bare trust which would otherwise be in scope.
However, the line is clearly drawn at cash only holdings. Where an investment portfolio or premium bonds are held by an adult on behalf of a minor child, these arrangements remain in scope and any trusts arising will need to be registered – although further representations have been made to HMRC about whether premium bonds could be excluded.
Another tricky area is jointly held property, and it is well worth looking at HMRC’s manuals which have recently been expanded with further examples.
Penalties and discrepancy reporting
We are often asked what will happen if the trustees don’t register – either because they refuse to engage or are simply not aware of the obligations.
Although HMRC has not yet released details of the penalty regime, we are expecting their focus to be on penalising those who deliberately refuse to register. Where the omission is not deliberate and HMRC identify the trust as missing from the register, trustees will be given an opportunity to put things right before penalties are imposed.
From September 1, 2022, trusts which do business with obliged entities such as accountants, agents and investment advisers will find it a lot harder to avoid registration. For new engagements after that date, if the trust should be on the register, these entities will need to request proof and report any discrepancies to HMRC.
In practice, the most likely discrepancy will be failure to register. For accountants and tax advisers, provided there are no other AML concerns, it should still be possible to take on the trust provided it is then registered promptly, but not all investment firms will be able or willing to carry out registration.
This could cause delays in receiving investment advice while trustees seek assistance elsewhere. We are expecting further guidance from HMRC on the details of discrepancy reporting shortly.
Given the complications and complexities at every stage, it is not surprising that there has been only a small fraction of the expected trusts registered to date. However, for more active trusts, once the discrepancy reporting regime is in place, failure to engage with their obligations could cause them problems obtaining advice on trust matters in the future and so it is worth pressing on with identifying all affected trusts prior to 1 September.