UK's Trust Registration Service And US Revocable Trusts

Impact For US Revocable Living Trusts

Amongst other types of trusts, there is now increased scope for US revocable living trusts, an oft-used US estate planning vehicle, particularly those with UK resident trustees, being caught by the registration rules; and a trend of trustees of such US trusts being unaware of their obligations under the TRS, with potentially severe consequences. This article focuses on the impact of the widened scope of the TRS on US revocable living trusts.

Given the wide scope of the new rules, the fact that HMRC guidance remains unclear on certain issues and the scope for penalties for late registration, trust arrangements should be reviewed, and advice taken, if not already.

Expanded Scope

Under 5MLD the rules expanded to create obligations for all UK express trusts, and some non-UK express trusts, whether or not they have a UK tax liability, but subject to a carve-out for various categories of trust (excluded trusts) due to their low risk of being used for money laundering or terrorist financing. The types of trust so exempted include:

• a bare trust of UK land where the land is co-owned by five or more persons;
• registered pension trusts;
• trusts holding life insurance policies, but only policies that pay out solely on the death, terminal or critical illness, or disablement of the life assured. This exemption is not available for trusts holding policies that can be redeemed at other times, such as life bonds;
• UK registered charitable trusts;
• “pilot trusts” created before 6 October 2020 whose property is worth no more than £100;
• bare trusts for minors, where the sole asset held is a cash balance at a bank;
• will trusts for the period of two years from the deceased's death; and
• trusts of jointly held property where the trustees and the beneficiaries are the same persons.

Broadly, the main categories of trust that must now be registered, in addition to trusts that have a UK tax liability, are:

• UK express trusts which are neither an excluded trust nor an EEA registered trust.

     A UK trust is one where:

- all the trustees are resident in the UK; or

- at least one trustee is resident in the UK, and the settlor was resident and domiciled (under general law) in the UK at the time the trust was set up, or when the settlor added funds to the trust (a UK Trust).

    An express trust is one created intentionally by the settlor, rather than imposed by law.

An EEA registered trust is a trust whose beneficial ownership information is required by 5MLD to be held in a central register of an EEA state other than the UK.

• non-UK express trusts (a non-UK Trust), unless an excluded trust or an EEA registered trust, where there are connections to the UK, for example where UK real estate is held or, for trusts where there is at least one UK resident trustee, the trustees enter into a business relationship with a UK relevant person such as a financial institution, legal professional, accountant etc.

Information To Be Registered

For trusts without a UK tax liability, there is no obligation to provide information about the trust itself or the assets held by the trust. Such obligations only apply where the trust is a taxable relevant trust. Surprisingly, the legislation does not require the name of the trust to be provided and although the trusts register portal asks for it, in theory an alias can be provided.

However, the following information is required in respect of individual beneficial owners of the trust (which include settlors, trustees, individuals who have control over the trust (such as protectors) and beneficiaries):

• the individual's full name and month and year of birth;
• his country of residence;
• his nationality; and
• the nature and extent of the individual's beneficial interest.

For trusts which do incur a UK tax liability, further information is required, including trust asset values at the time of registration.

Privacy Concerns

As well as sharing information on the TRS with law enforcement agencies, HMRC may grant access to an individual who is able to demonstrate they are looking into a specific instance of money laundering or terrorist financing activity.

To ensure that the person is investigating suspected money laundering or terrorist financing and that the suspicion is reasonable, HMRC is required take into account a number of factors, to establish whether a person has a legitimate interest.

As a further safeguard, HMRC is able to refuse an information request where it concludes that the information should be withheld because the “beneficial owner” to whom the accessible information relates would be exposed to a disproportionate risk of fraud, kidnapping, blackmail, extortion, harassment, violence or intimidation, is a minor or lacks mental capacity.

It is thought likely that information relating to beneficial owners will not be released by HMRC in response to an information request except where the person seeking the information is doing so for legitimate reasons and that the greater concern is that the TRS may be hacked, or information on it leaked.

Implications For US Revocable Trusts

The expansion of the categories of trust which are registrable under the TRS has notable implications for US revocable trusts which are used commonly for US estate planning purposes including to circumvent the costly and lengthy US probate process in respect of US assets.

Although previously it was necessary to consider the UK tax characterisation of such a trust (i.e. whether it was a bare trust or substantive trust for UK tax purposes) to determine any registration requirements under the TRS, the new rules mean that there is a registration requirement for US revocable trusts, regardless, if those trusts are:

• UK Trusts (as defined above); or
• non-UK Trusts with a relevant UK connection (as explained above).

It is unlikely that a US revocable trust would own UK land due to the adverse UK inheritance tax implications associated with structuring ownership in this way (for example, there would be, broadly, a charge at an effective rate of up to 25 per cent on the value of the UK property when transferred to the US trust).

Rather, a registration requirement is more likely to arise if there is one UK resident trustee, and the trustees, in their capacity as trustees, enter into a business relationship with a financial institution, legal professional, accountant etc that has an element of duration with a UK relevant person. (The government has indicated that this will be the case if the relationship is expected to last for more than 12 months).

Much more likely a scenario, however, is where a settlor of a US revocable trust is the sole trustee during his lifetime and becomes, or already was, UK resident. Unless such a trust was established prior to 6 October 2020 and falls under a de minimis exception (explained below), such a trust may well need to be registered on the basis that it will be a UK express Trust for TRS purposes. That said, there is an argument that certain US “trusts” should not be characterised as trusts under English law at all. The TRS legislation does not define the term 'trust' but implies it encompasses a foreign law arrangement creating rights and obligations, broadly equivalent to those created by a English common law trust.  As Millett L.J. confirmed in Armitage v Nurse [1998] Ch 241 “there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts.”  A “trust” whose grantor is the sole trustee and which does not impose any fiduciary obligations on that trustee to other persons is, therefore, arguably not a English common law trust at all.  For this reason, it is crucial to analyse US revocable trusts on a case by case basis before concluding on TRS registration requirements.

Pilot Trusts/De Minimis

Although certain bare trusts or nominee arrangements fall within the definition of an excluded trust (for example, UK property co-ownership trusts, where the trustees and beneficiaries are the same persons), generally speaking bare trusts or nominee arrangements are required to register.

However, trusts created with a nominal amount with a view to being further funded at a later date, for example, on the settlor’s death, (pilot trusts) which were settled before 6 October 2020 and whose property is worth no more than £100 are excluded from registration.

That means there is scope for some US revocable trusts set up before 6 October 2020 by a UK resident, and with funds below the £100 threshold, to be excluded from registration requirements, where they may otherwise have been required to register. However, it is clear that once further funded beyond the threshold, for example on death, such trusts will become registrable.

Reporting Deadlines

Trustees of non-taxable trusts were required to submit the required information to HMRC by 1 September 2022, if the trust first qualified for registration before 4 June 2022. The information must be provided, in other cases, within 90 days of the establishment of the trust or, if later, within 90 days of the trust first qualifying for registration. Any change in information must be notified to HMRC within 90 days of the trustees becoming aware of the change.

Penalties For Non-Compliance With Register

The penalties for non-compliance are potentially severe and there is scope for criminal sanctions, including a term of imprisonment of up to two years. However, a defence is available if the trustee took all reasonable steps and exercised all due diligence to comply with the rules. Furthermore, HMRC has confirmed that there will be no penalty for the first offence of failure to register or a late registration unless this can be attributed to deliberate behaviour on the part of the trustees, although where there is a deliberate failure to register, a £5,000 penalty may be charged per offence.

Nevertheless, given the scope for penalties for late registration and the wide scope of the new rules, trust arrangements should be reviewed, and advice taken, if not already, particularly where there are UK resident individuals holding assets through a US revocable living trust.

Matthew Radcliffe TEP
Matthew provides advice to offshore, onshore and multi-jurisdictional individuals, families, trustees and beneficiaries regarding taxation, trust and estate planning matters. He is familiar with devising and coordinating tax and estate planning across a number of jurisdictions and in particular specialises in tax and estate planning where there are US, UK and Canada cross-border issues. He also has expertise in advising on the UK tax treatment of foreign entities including foundations and trusts and UK residential property holding structures.