Trust Registration – The Latest Developments

We have all heard the saying “”Put not your trust in money but put your money in trust.”. Interestingly, this was never concerned with tax planning, but was directed at nineteenth century heiresses whose wealth would pass to a husband on marriage, unless suitably protected. Surprisingly, some of these archaic trusts are still in existence, and some of them should by now have been logged with the Trust Registration Service which was set up in 2017 as a result of the fourth Anti Money Laundering Directive. Even though most trusts with annual tax liabilities already had HMRC files since the trust register, which was set up in 2017, was not compatible with the previous HMRC records, those trusts were all obliged to re-register. The obligation applies to all formally created trusts unless they fall into certain exempt categories – the exemption usually being that it carries no liability for any tax other than minimal amounts of bank interest.

Data released by HMRC in February suggests that the registration requirement has already been missed by many trustees. Registration for existing trusts should have been made by January or March 2018, but by February 2019 only 85,000 trusts had registered – somewhat fewer than the 141,000 which filed self-assessment tax returns in previous years.

The key dates for registration are 5th October following the tax year when a capital gains tax or income tax liability first arises, and 31st January following the tax year in other cases. Failure to register can give rise to a penalty, starting at £100 and rising to £300 or more after six months. So, judging from the February trust statistics report, at least 56,000 trusts will already be in a penalty position, not to mention others which may have been caught by the new registration rules, but which had not previously been submitting annual returns. It seems probable that most professionally administered trusts will have been compliant, but understandably, many lay trustees, being aware that they have regularly filed self-assessment returns, may not have realised that further action was required on their part.

The position is set to become even worse. The fifth Anti Money Laundering Directive was passed by the EU in July 2018 and is set to pass into UK law in March 2020. This will bring ALL expressly created UK trusts (and some non-resident trusts) into registration, including those which generate no income or gains or where the income is paid to and declared by a beneficiary. It has been estimated that this might raise the number of trusts which SHOULD be registered from about 200,000 (of which less than half are complying) to around 2 million.

It is not uncommon for farming businesses to have a certain level of exposure to trusts. To take a completely fictitious example, we might see two brothers farming in partnership with:

  • Lower Farm owned by grandma’s 1942 marriage settlement, with the farm paying a rent to her which she declares it on her own tax return. The trustees both died decades ago and have not been replaced. No one has therefore registered it, nor has anyone needed to. The trust terminates in 2022.
  • Green Farm being held by grandpa’s discretionary settlement for his grandchildren, who are receiving irregular amounts whilst they are at university. This has a professional trustee and is already registered
  • Church Farm, which is held by the executors of uncle John.  The brothers have life interests, but no rent is paid by the partnership. On their death it is divided between their children. Everyone has forgotten this is in trust.
  • Eight pension and insurance policies taken out over the years and held in several different trust arrangements

At present, and quite correctly, only one trust is registered. By 2020 the number will rise to eleven. There is a strong possibility that some of these will be overlooked unless someone grasps the registration nettle, and even then, there will be problems in tracking down executors and trustees who may not have been seen for years or indeed, who may no longer be alive.

Whilst March 2020 seems some distance away, it is not too soon to start putting steps in hand to ensure compliance and avoid penalties. HMRC have indicated that the deadline for existing trusts requiring registration under the fifth Directive will be extended to 31st March 2021 (new ones will be working to a 30-day deadline), but time flies and this should definitely be added to the list of “Jobs for a rainy day”.

If you have any queries or you wish to discuss this further, please do not hesitate to contact Sue Buckingham or Alison Houghton.