Nick Edwards and John Woolley explain why recent HMRC changes mean advisers should discuss with clients whether their trusts need to be registered
Recent changes mean that financial advisers who have helped their clients to establish trusts must now give serious thought to discussing the need to register the trust to comply with money laundering regulations.
Until recently, only trusts with a tax liability needed to be registered and, of course, as trusts holding life policies and pension plans rarely cause a tax liability on the trustees, they did not need to be registered. Recent HMRC changes now mean that almost all express trusts – irrespective of whether they are taxable or non-taxable and irrespective of when created – need to register and provide the information required. For the many advisers who use trusts in financial planning, this is therefore a serious issue.
An express trust is one that has been created deliberately by the settlor. Most cases will be clear cut but uncertainties can arise. For example, when a client sets up an investment plan as a designated account, there will be no trust deed but the arrangement will be treated legally and for tax purposes as a trust (assuming the donor’s intention at the time of designation was to make an outright and absolute gift). The investor will be regarded as the donor/settlor and trustee of the trust. HMRC has confirmed that these ‘trusts’ are express trusts that need to be registered under the Trust Registration Service (TRS). For designated accounts established in Scotland, special formalities need to be satisfied for the arrangement to be treated as a trust under the law of Scotland.
HMRC provides a list of trusts with a perceived low risk of being used in money laundering (‘excluded trusts’), which do not have to be registered. An example is a trust that holds an insurance policy that only pays out on death, terminal illness or to meet healthcare costs of the person assured.
But what if a surrender value is payable under the policy? HMRC has now confirmed that if the surrender value can only be accessed on the full surrender of the policy, the trust can be regarded as an excluded trust. If, however, the life policy is designed to provide regular or periodic payments to the policyholder in the form of part surrenders with a small life assurance element payable on death, which is incidental to the benefits provided through the surrenders, then the trust holding the policy cannot be an excluded trust. This means that trusts of single premium bonds and/or capital redemption policies – including gift trusts, discounted gift trusts, loan trusts and flexible reversionary interest trusts – will all need to be registered.
‘Pilot trusts’ are frequently used in spousal bypass trust planning. These trusts will only be excluded from registration if they were created before 6 October 2020 and currently hold assets of no more than £100. While most of these types of trust will only hold nominal sums – at least until death benefits are paid – this means that all such trusts established since 6 October 2020 will need to be registered.
Trusts that need to register must do so by 1 September 2022 or within 90 days of the creation of the trust
Trusts that need to register must do so by 1 September 2022 or within 90 days of the creation of the trust, whichever is the later. It clearly makes sense to register sooner rather than later and, for existing trusts, definitely not later than 1 September 2022.
Trustee Support Services can assist trustees with registering their trusts on the TRS. PFS members and their client trustees can access these services at the launch price of £200 per trust until 1 July 2022. Please email your PFS membership PIN when registering an account on our website and we will provide a code to use when submitting the trustee questionnaire.
Nick Edwards and John Woolley are directors of Trustee Support Services