Why is Trust Registration delaying your client’s investment?

This article explores the hidden administrative burden brought about by HMRC’s Trust Registration service - and gives the information you need to save time for you and your clients.

How did we get here?

Some time back in 2016 I received an alert informing me of an HMRC consultation on the ‘transposition of the Fourth Money Laundering Directive’ – a EU driven anti-money laundering initiative. Little did I know that this would be the subject which would dominate my professional life for the next 7 years.

4MLD, as it was known, didn’t have a particularly large impact. Generally, the UK’s implementation only required a trust to register if it had a UK tax liability on a UK based asset. This link to tax caused HMRC to remove the form ‘41G’, previously used by Trustees to request a Unique Taxpayer Reference (UTR) to report trustee tax. In its place taxable trustees would now need to register the trust to receive their UTR.  This confusing link to tax would cause some to question the purpose of the legislation.

5MLD followed in short succession in 2018. The view had been that 4MLD had not gone far enough and so 5MLD aimed to fill the gaps. Under 5MLD all UK resident ‘express’ trusts need to register, regardless of whether they’re taxable or not. Despite some delays the new ‘Trust Register Service’ (TRS) was launched in September 2021, with a deadline for affected trusts to have registered by 1 September 2022. New trusts created after this date have 90 days to register from date of declaration.

Generally, the deadline for registration was well understood and the industry kicked into high gear with articles and guides to help their trustee clients to meet it. In fact, so much focus was placed on who needs to register and by when, that the long-lasting impact of trust registration has managed to go almost completely ignored.

Introducing, discrepancy checking

Despite the historic link to trust taxation, the aim of 5MLD is to tackle money laundering. Under the new legislation a ‘Relevant Person’ (which has a broad definition which includes financial institutions, tax advisers and accountants) entering a ‘new business arrangement’ with a trust is required to obtain evidence that the trust has registered. They must then perform a check for discrepancies between the evidence and the information supplied to them as part of the application process. Any discrepancies must be resolved prior to entering the business arrangement or they are reported to HMRC.  ‘Business arrangement’ also has a broad definition, it includes an application for investment product by an existing trust as well as transferring a new or existing investment held by the settlor as a gift to a new trust.

Whilst a bumpy transition period was to be expected, 10 months after the registration deadline the industry is still discussing the ins and outs of these rules and debating HMRC’s guidance. This hasn’t help financial advisers adapt to the changes, with missing or incorrect evidence of registration being one of the top causes for delays in trustee applications.  Here’s a list of things you need to know to effectively support your trustee clients.

It’s not all about new clients

Anyone placing an existing investment into trust will be required to provide evidence of registration. Depending on the circumstances, product providers may record the trust and ask that the evidence is sent in within a certain time frame.  Failure to provide the evidence when requested will need to be reported as a discrepancy to HMRC.

Equally, product providers now have a requirement to request updated evidence of registration where there is a change to the trust’s records - for example the addition of a new trustee. Trust will need to provide evidence that shows the change has been reflected on the register.

Costly consequences

Failure to register or keep records up to date can land your client a £5,000 fine.  HMRC have stated that the fine will be applied where the trust has ‘deliberately’ avoided their responsibilities. How this is judged and applied remains to be seen. However, as relevant persons are required report any discrepancies they find, you can guarantee we won’t have to wait long to find out.

It is also worth noting that discrepancy checking sits alongside a relevant person’s duty to undertake due diligence under section 28 of the Money Laundering 2017 regulations. When a discrepancy arises, the relevant person must consider the risks it causes with the wider regulations in mind. It must then take the decision to either suspend or end the business relationship with the trust. As these rules depend on circumstances of each case and the risk assessment of the product provider, the outcome could be anything from delayed surrenders to forced account closures. It is therefore absolutely vital that updating the register, and providing evidence, becomes a fixture in your to do list.