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New year deadline for registering employee benefit trusts with HMRC

Posted: 28/11/2017

New regulations for 2017 create obligations to register certain trusts, including EBTs, with HM Revenue & Customs via HMRC’s online trust registration service. These obligations will apply to employee benefit trusts (resident and non-resident) if the trustees are liable to pay UK taxes on trust assets or income. The deadline for registering new trusts (ie those that have incurred a liability to income tax or capital gains tax for the first time in the 2016-2017 tax year) is 5 January 2018. The deadline for existing affected trusts to register is 31 January 2018. There are civil and criminal sanctions for failing to comply, including late filing penalties.

Part of the general push towards greater transparency, these obligations are contained in The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the 2017 Money Laundering Regulations). The 2017 Money Laundering Regulations affect trusts, including EBTs, in a number of ways, requiring certain trusts to register with HMRC and requiring a broader category of trusts to maintain certain categories of records.

Registration with HMRC

The registration requirements apply to trusts which are liable to pay UK taxes on trust assets or income. The relevant UK taxes are income tax, capital gains tax, inheritance tax, stamp duty land tax, stamp duty reserve tax, land and buildings transaction tax (Scotland). In the case of an EBT, this is most likely to arise on a sale of shares held by the EBT (for example when shares are sold to employees under options or on an exit) or from income on dividends. The registration requirements can apply to both UK-resident and non-resident trusts, though the position is slightly different for non-resident trusts.

HMRC guidance indicates that if the trust has no UK income and there is no likelihood of the trustees being liable to pay UK taxes in the foreseeable future, there is no need to register at present. This may be the case for many EBTs though by no means all. Often EBTs are set up with dividend waivers in place so that the trustees waive dividends unless shares are held for particular beneficiaries in which case no income tax may arise. Similarly, they are usually structured so as to benefit from IHT exemptions. UK-resident EBTs will, in principle, be subject to capital gains tax on disposals of shares but whether or not it is likely to arise will depend on the likely future transactions in shares held by the EBT.

Non-resident EBTs are less likely to have to register as they are only required to do so if they are liable for UK taxes on UK-source assets or income. Again, often dividend waivers are in place and in the case of capital gains tax, non-resident EBTs will not usually be subject to CGT on disposals of shares.

Affected trusts must register via HMRC’s trust registration service and provide certain information about the trust and beneficial owners and keep this up to date. This includes basic details of the EBT, the trustees, trust accounts and details of the beneficiaries. In the case of an EBT, a broad description of the class of beneficiary can be given (rather than naming every potential beneficiary) but HMRC do expect directors and key employees to be identified. HMRC comments in its guidance that key employees would include those “at the top of the organisational chain by making key decisions or that have a financial ownership or stake in the organisation” or those “whose skills and expertise are critical to the business for which they enjoy a high level of remuneration”.

Trusts which have incurred tax liabilities for the first time in the 2016-2017 tax year are required to register by 5 January 2018 (HMRC has extended this deadline twice - from 5 October 2017 and then from 5 December 2017). In future years, the deadline for new trusts will be the 5 October following the end of the relevant tax year. Trusts which have previously incurred tax liabilities are required to register by 31 January 2018 (and subsequently to register any updates by 31 January each year).

There are civil and criminal sanctions for failing to comply, including late filing penalties. HMRC have made some noises about a softer approach to penalties in the first year but that should not be relied upon and affected trusts should ensure they take action by the relevant deadlines.

Record-keeping and information requirements

The 2017 Money Laundering Requirements also require trustees to keep records with information about beneficiaries and provide that information on request to law enforcement authorities and relevant persons. These requirements apply to UK-resident trusts (whether or not they have tax liabilities) and non-resident trusts with UK-source income giving rise to UK taxes.

The “relevant persons” to whom information must be provided include where the trust is entering into a transaction or business relationship with someone in a regulated sector who is obliged to carry out customer due diligence checks. Typical examples are when instructing a law firm or appointing auditors to the EBT.

The scope of information required is similar to that which must be provided when registering with HMRC and this shouldn’t result in any particular additional burdens on trustees. This is information which they ought to have been maintaining in any event and would have regularly been asked to provide to banks and advisers.

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Penningtons Manches Cooper LLP is a limited liability partnership registered in England and Wales with registered number OC311575 and is authorised and regulated by the Solicitors Regulation Authority under number 419867.

Penningtons Manches Cooper LLP