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UK implementation of the Fifth Money Laundering Directive

Posted: 30/10/2020

The Government has introduced new legislation which increases reporting obligations for trusts, following its implementation of the European Union’s Fifth Money Laundering Directive (5MLD). The legislation came into force on 6 October 2020 and has wide-ranging implications for trusts. It extends new reporting obligations to a significant number of trusts, and trustees will need to consider timescales and information they must provide to HMRC as a result of the legislation. Trustees should act now to review the position of their trusts and to ensure they are fully compliant with any legislative requirements.

The previous position under 4MLD

In 2017, the UK Government introduced new record keeping obligations on trustees. As part of these obligations HMRC required trustees to register information relating to their trust as part of its Trust Registration Service (TRS). For further background information on the TRS and its introduction, please read our contemporaneous comments and guidance.

It became mandatory for the trustees of UK express trusts (a trust intentionally created rather than one arising by the operation of law) and certain non-UK trusts to register on the TRS if any of the following UK taxes had become payable by the trust:

  • income tax;
  • capital gains tax;
  • inheritance tax;
  • Stamp Duty Land Tax; and/or
  • Stamp Duty Reserve Tax.

What are the current TRS requirements?

If a trust incurs a liability to income tax or capital gains tax, the trustees must register the trust by 5 October following the end of the tax year in which the liability arose. For other relevant taxes, the registration deadline for trusts is 31 January following the end of the tax year in which the liability occurred.

A trust should be registered via HMRC’s website using an online Government gateway account. Trustees are able to register the trust themselves or may arrange for a tax agent to complete this on their behalf.

What details need registering through the TRS?

Trustees are required to report details of how the trust was established and the assets held within the trust, as well as personal details for all the parties involved. These would usually include the settlor, trustees and beneficiaries. The trustees will need to report the person’s full name, date of birth, address, national insurance number and the nature/extent of an individual’s beneficial interest.

HMRC has indicated, through published guidance, that where a beneficiary is not specifically named, being only part of a class of beneficiaries, the personal details will only need to be reported when they receive a financial or non-financial benefit from the  trust.

What are the ongoing requirements for trusts registered on the TRS?

Currently, for years in which the trustees are subject to a tax liability, HMRC will require trustees to make an annual declaration on the TRS confirming the details previously provided are accurate and up to date.

The declaration needs to be made by 31 January after the end of the tax year in question, which coincides with the trustees’ self-assessment reporting deadline. However, changes can be made on a voluntary basis at any point in time, even if the trustees have no UK tax liability. At present, if the trustees have incurred no UK tax liability there is no requirement to make a declaration.

Where a trust has come to an end, the trustees are obliged to make a declaration to this effect on the TRS – this is in addition to any self-assessment filing obligation.

Who does 5MLD apply to?

Broadly, the registration requirement under 4MLD of incurring a UK tax liability no longer applies - any UK express trust and certain offshore (non-UK) trusts which are not specifically excluded will need to comply with these new reporting requirements.

The legislation categorises these trusts into three main categories:

A: A UK express trust which is not specifically excluded or registered elsewhere in the European Economic Area (EEA). The EEA includes EU countries as well as Iceland, Liechtenstein and Norway.

B: A non-UK trust which has at least one UK resident trustee, has not been registered in the EEA, is not specifically excluded and:

  • enters into a business relationship within the UK; or
  • acquires an interest in land in the UK.

“Business relationship” means any business, professional or commercial relationship between the trustees and a UK service provider.

C: A non-UK trust which has no UK resident trustees, is not specifically excluded and the trustees acquire an interest in land in the UK.

“Interest in land” means where a trustee is registered on the title at the Land Registry.

The legislation suggests that categories B and C (non-UK trusts) will only apply to the future acquisition of land or the entering of a business relationship. Further guidance from HMRC should be considered, before any steps are taken, to ensure proper compliance with the legislation.

What are ML5 excluded trusts?

There are a number of trust arrangements that are specifically excluded. The most common will include:

  • legislative trusts and those imposed by court order;
  • pension scheme trusts – which are registered pension schemes;
  • insurance policy trusts – which only pay out on death terminal/serious illness, disablement or to meet the costs of healthcare for the person assured;
  • charitable trusts – which are registered as a charity or are excluded from doing so;
  • pilot trusts – which do not have a value greater than £100 and were created before 6 October 2020;
  • trusts created on death – which only hold an interest in an un-administered estate or the death benefits of the deceased and less than two years has passed since death;
  • co-ownership – where the trustees and beneficiaries of jointly held property are the same person;
  • personal injury trusts; and
  • certain commercial trusts.

What new trusts are caught by 5MLD?

While the exclusions above are welcome, a significant number of non-taxpaying trust arrangements will be captured by these new rules. Examples of these include:

  • trusts holding investment bonds which previously had no tax events at a trust level;
  • dormant trusts which hold assets (such as a property or a loan) for a surviving spouse or other beneficiary after death;
  • nominee and bare trust arrangements where someone holds an asset only as a legal owner for another person. This may include scenarios such as parents holding assets for their minor children, although it is hoped that such hugely common arrangements will be excluded in subsequent HMRC guidance; and
  • property trusts where the legal and beneficial ownership differs, which may, for example, include property purchased by a parent for a child.

What steps are required by trustees under 5MLD?

The requirements will be very similar to those indicated above under the current regime. Entities caught by these provisions will need to register with HMRC via the TRS. Trustees are able to register the trust themselves by creating a Government gateway account or may arrange for a tax agent to complete this on their behalf.

Under the legislation, the trustees will need to report various details of all the parties involved. These will usually include the settlor, trustees and beneficiaries. The trustees will need to report the person’s full name, date of birth, country of residence, nationality, nature and the extent of an individual’s beneficial interest.

It is worth noting that the legislation indicates a greater level of detail should be reported than the TRS has the facility to receive. HMRC may make changes to the TRS to allow for the input of the information.

When will the implementation of 5MLD apply from?

These new registration requirements came into effect from 6 October 2020. Any trust in existence as at this date will be required to comply with the updated registration requirements.

These trusts, along with those created before 9 February 2022, will be required to register under the TRS by 10 March 2022. Trusts created after this date will need to register under the TRS within 30 days of creation. It therefore may be prudent to ensure trustees are aware of their requirements and collate the required information while the trust is created.

At present, only trusts which are required to register under the provisions of 4MLD can use the TRS. It is expected that the TRS will not be upgraded to accept registrations under 5MLD until early 2021.

What are the ongoing obligations under 5MLD?

From 10 March 2022, trustees will be required to report any changes to the information contained on HMRC’s TRS within 30 days of the trustees becoming aware of the change. This may include a change in a beneficiary’s address, change in trusteeship or anything of a similar nature.

As mentioned above, HMRC now requires trustees to make an annual declaration when a tax liability is incurred, confirming the details contained on the TRS are correct. Whether this is extended to all trustees regardless of whether a tax liability has been incurred or not is yet to be seen. As is currently the case, financial penalties and sanctions can be applied by HMRC to trustees who fail to comply with their reporting obligations.

Can any third parties access the trust register?

The information held by HMRC can be accessed by those who demonstrate a legitimate interest in the beneficial ownership of a trust. In a recent consultation, HMRC has stated the ‘legitimate interest’ application process will aim to ensure that each request will be reviewed on its own merits. Access will only be given where there is evidence that it furthers work to counter money laundering or terrorist financing activity. The Government believes that this approach strikes the right balance between the conflicting demands of transparency and privacy.

This ‘legitimate interest’ principal will not apply to trusts which have a controlling interest in a non-EEA entity, although it is probable HMRC will still require evidence to support any such requests.

The above will not apply in situations in which the beneficial owner is under 18, the beneficial owner has a lack of mental capacity or HMRC considers the release of information will expose someone to a disproportionate risk eg fraud, kidnapping, blackmail, extortion etc.

We will closely review the application of HMRC’s intended approach in practice.

How can we help with the requirements?

We will be able act as agents to complete registrations, amendments and annual declarations for trustees who require assistance in meeting their obligations under 5MLD. We already administer and manage numerous registrations under the existing requirements on behalf of external trustees and our own trust company. We have developed a streamlined and cost effective approach to deal with the Trust Registration Service.

The above is based on the legislation at the time of writing. It is likely that interpretive guidance issued by HMRC will provide further clarity and assist with understanding and interpretation of the legislation.

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