5MLD is coming...
The UK government is consulting on expanding the requirements for trusts to be registered with HMRC, as part of a raft of measures to implement the latest EU Anti-Money Laundering law (known as 5MLD). The changes are likely to: a) significantly increase the number of trusts that need to be registered with HMRC; and b) widen the circumstances in which trust information can be accessed.
In 2017, HMRC created the Trust Registration Service (TRS) as part of the UK's implementation of the previous EU Anti-Money Laundering Directive. The TRS currently requires all express trusts that incur a UK tax consequence (i.e. a liability to income tax, capital gains tax, or inheritance tax) to register.
Amongst other data, the TRS requires the identity of trust beneficiaries and the value of trust assets to be recorded on the register; information which those involved in trust creation and administration would previously have expected to be kept completely private.
The EU published the Fifth Anti Money Laundering Directive (5MLD) in 2018, expanding the anti-money laundering requirements applicable to trusts. The government has recently outlined its initial proposals for implementing 5MLD and is seeking feedback from industry stakeholders by 10 June 2019 via this consultation.
Under the new proposals, many more trusts will now have to be registered. The proposals also expand the circumstances in which data held on the register can be accessed, though it remains unclear whether these will include 'public interest' circumstances which may allow investigative journalists to view the register.
Understandably, these proposals are cause for concern for trustees, beneficiaries, and their professional advisors alike. Whilst most in the industry would agree that there should be laws in place to prevent trusts being used as a vehicle for money-laundering and financing criminal or terrorist activities, there is concern that 5MLD is a step too far.
What are the proposed changes?
The following trusts will now have to be registered with the TRS:
- all UK resident "express trusts" (not just those with UK tax liabilities)
- non-EU resident express trusts that acquire UK land or property either on or after 10 March 2020 and
- non-EU resident express trusts that enter a new business relationship with an "obliged entity" on or after 10 March 2020.
Under 5MLD, the government will be required to disclose specific information about a trust held on the TRS in certain circumstances, including:
- with obliged entities that enter a business relationship with the trust
- with persons who can demonstrate a "legitimate interest" in access to information and
- with persons who want to know about trusts with a controlling interest in a non-EEA company.
The onus will be on trustees and their advisors to determine whether a trust is an express trust or not. HMRC gave examples of UK trusts that will likely be express trusts: discretionary trusts, interest in possession trusts, charitable trusts, employee ownership trusts and bare trusts. At present, the proposals don't appear to include 'de minimis' exceptions, meaning that pilot trusts (those typically created with an initial trust fund of £5 or £10 and which sit dormant until life insurance or death in service benefits are paid out on the settlor's death) may also be caught. The Association of Tax Technicians believe that this would mean as many as 2 million trusts having to be registered, as opposed to the 200,000 registered under the current regime.
The government must consider any request to share information about a trust registered on the TRS with anyone who claims to have a "legitimate interest" in accessing that information.
What constitutes a "legitimate interest" is not defined by 5MLD. Early indications are that the UK government plans to construe this requirement narrowly and that the definition will be closely linked the stated purpose of 5MLD – i.e. combatting money laundering and terrorist financing.
The proposals suggest that those seeking information will need to provide evidence underpinning their belief of a "legitimate interest". The consultation also suggests that a more restrictive approach will be taken to requests relating to trusts in favour of minor children and vulnerable persons.
This is to be welcomed because, as HMRC acknowledges, it is important that trusts used for ordinary purposes are protected from requests made for inappropriate reasons and information should only be shared with due cause. However, there have been references in 5MLD material published by the EU which suggest that investigative journalists pursuing 'public interest' investigations (such as the Panama Papers exposé) might also be given access.
The following deadlines for registration on the TRS are proposed:
- 31 March 2021 for unregistered trusts already in existence on 10 March 2020; and
- within 30 days of creation for new trusts established on or after 1 April 2020.
Whilst the exact definitions have not yet been finalised by HMRC, changes to the TRS registration requirements are coming. The government has indicated that 5MLD will be implemented notwithstanding Brexit.
Trustees and advisors should start considering now which of their book of trusts fall into the new registration categories and take appropriate action before the proposed deadline of 31 March 2021.
As HMRC makes its new requirements clear, we can provide advice in respect of which trusts need to be registered and how to register them. We can also assist in relation to any questions and concerns trustees or beneficiaries might have in respect of disclosure by HMRC.