How Does the Trust Registration Service Combat Money Laundering?

The Trust Registration Service (TRS) was introduced by HM Revenue and Customs in 2017 to fulfil its obligation under the Fourth Money Laundering Directive (EU) 2015/849 (MLD4).

What Are the Current Reporting Obligations?

Trustees need to register a trust with the TRS if the trust is a 'registerable taxable trust'. In England and Wales, this means a trust for which income tax, capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax is payable.

In addition, the personal representatives of an estate might need to use the TRS to register 'complex estates'. There are several ways in which an estate can qualify as 'complex' but essentially a complex estate is one that is valued at in excess of £2.5m, or where property valued at more than £500,000 is sold during the tax year.

What Has Changed?

The Fifth Money Laundering Directive (EU) 2018/843 (5MLD) was introduced on 6 October 2020. 5MLD requires 'registerable express trusts' (RETs) to be registered, even if none of the taxes listed above are payable in respect of the trust. The 5MLD extends the scope of trusts that require registration, although certain trusts are excluded. These include pension scheme trusts, trusts of insurance policies, charitable trusts and pilot trusts that hold less than £100.

Importantly, trusts of land are excluded from registration but only if the trustees and beneficiaries of the trust are the same people. This means that people who own their property as joint tenants are excluded from registration, but not all people who own property as tenants in common will be excluded. For example, if two people own the legal title of a property as tenants in common but they hold the beneficial title on trust for themselves and others, the trust needs to be registered under 5MLD.

Although the new rules were introduced in October 2020, it isn't yet possible to register RETs on the TRS. The Revenue needs to update the TRS so that it can accept registrations of RETs and it is taking the Revenue longer than anticipated to update its systems.

The original deadline to register RETs was March 2022, but that deadline has been extended and, at present, it is likely that registration will be required by the summer of 2022.

Following 5MLD, HMRC will be able to provide information about a trust to third parties in certain circumstances. Individuals and organisations can make a 'legitimate interest request' for information. A request can be made if an individual or organisation thinks that a trust might have been used for money laundering or terrorist financing. The individual or organisation making the request must explain how they will use trust data.

Individuals and organisations can also make a 'third country entity' request if the trust holds a controlling interest (more than 50% of the shares) of a non-EEA company or other legal entity.

If the Revenue accepts a request for information, it will provide information to the individual or organisation about the beneficial owners of the trust assets. The information will include the beneficial owner's name, month and year of birth, country of residence, nationality and their role in the trust (unless the beneficial owner is under 18, lacks mental capacity or might be at risk of blackmail, extortion, violence or intimidation).

It is important to note that, whilst 5MLD has introduced significant changes, it has not replaced 4MLD. 4MLD and 5MLD run concurrently and trustees and agents need to be aware of and operate both sets of rules. For example, if a trust needs to pay inheritance tax but it is an excluded trust under 5MLD, the trustees or their agent need to register the trust under 4MLD.

What Will the Effect Be on the Popularity of Trusts?

Trusts have declined in popularity in recent years and it is possible that trusts will become less attractive given the new reporting obligations and the possibility that information will be released to third parties.

HMRC (on 17 May) published detailed guidance about the extra requirements introduced by 5MLD.

For specialist legal advice, please contact William Hollins in our Private Client team on 020 7665 0905, or please complete the form below.