Trusts business - Where is the evidence?

Recognise your mistakes early

 

The good news is that the use of trusts with financial products is as popular as ever.  There is evidence that trusts are used more frequently in estate planning, both with investments and with protection life policies. Indeed, with the Consumer Duty upon us, not recommending a trust in certain situations could have serious consequences for the adviser.

 

The not so good news is that providers, whilst offering draft trust documentation alongside their products, often no longer have in-house technical departments. Instead, the processing of documentation is often outsourced to companies who specialise in the processing of administrative tasks but who generally have little technical or legal expertise.  So, whereas in the past if a trust form had not been completed correctly, any errors would normally be picked up when the application for the life assurance policy or investment was being processed and any potential problems avoided by rectifying any mistakes. These days frequent errors such as incomplete documentation, for example, omitting to specify the asset going into the trust, (eg policy number), omitting to name default beneficiaries or beneficiaries entitled to income, lack of signatures etc. might go unnoticed and only come to light in the event of a claim arising.  At such point it will generally not be possible to rectify any errors in the document itself and, if the error is substantial, the potential consequences can be disastrous. 

 

Another added layer of complication is the ongoing trend to automate and introduce digital forms and digital execution whenever possible. Whilst this is perhaps unavoidable and has undoubted benefits, it can also lead to “oversimplification” of any trust creation process with the motto being “sign this form, you can do it in just a few minutes”, using (most likely) one of the online singing platforms. Does the settlor of any such electronically created trust always have full understanding of what it is that they have signed? Furthermore, it is not unheard of a new online process being introduced by the provider without having regard to how it might affect completion of any trust documentation with a potential result of making some wording on the “trust form” nonsensical.

 

While the draft documentation will be provided by the investment or life assurance provider, the onus will be on the adviser, especially if he is remunerated by a fee, to ensure that all the documentation is completed properly and, if that is not the case, he may find himself liable for any consequences.  In fact, this concerns not just the completion of documentation but the entire process of setting up a trust including compliance with the identification requirements for anti-money laundering purposes. It also means advising client-trustees of their obligations in relation to record keeping.

 

Trustees’ obligations to keep records  

 

Even before the TRS came to bite on 1 September 2022 trustees had certain legal obligations to keep records which, had these been complied with, would have avoided problems of the “missing trust details”.

 

 First, we have the legal obligations under Regulation 44(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and then a separate set of obligations from HMRC where the trust is taxable or otherwise registrable.

 

The following are the legal requirements to keep records, regardless of whether the trust needs to be registered on the TRS or not.

A written record of the information listed below should be retained by the trustees. The “beneficial owners” for this purpose include all trustees, settlors, beneficiaries or any person who has control over the trust.

The information required to be retained is as follows:

Contact details for the trust:

• A contact address for the trustees
• Details of Advisers to the trust
• The full name of any advisers who are being paid to provide legal, financial or tax advice to the trustees in relation to the trust

 

Beneficial owners who are individuals:

• Full name
• Date of birth
• National Insurance number
• Address (if a National Insurance number cannot be provided.)
• If the address is not in the UK, passport or identification card details of the beneficial owner

Beneficial owners who are companies:

• The name of the company or business
• Unique Taxpayer Reference
• The registered or principal office of the company
• The legal form of the entity and the law by which it is governed
• The name of the register of companies and the company’s registration number (where applicable)

Where there is a class of beneficiaries:

• Description of the class of beneficiaries that is identifiable

                  

Additional requirements from HMRC

The additional records that must be kept depend on the type of trust but in all cases, trustees should keep the following:

• bank statements and confirmation of interest paid
• National Savings bonds or certificates
• certificates issued by life assurance companies
• dividend vouchers from companies and unit trusts
• stockbroker reports and records of dividends
• details of expenses paid by the trustees
• details of all taxes paid by the trust
• records of income payments to beneficiaries, (for discretionary trusts)

When a trust is an “express trust”, trustees must keep a record of the following information:

• the full name of the trust and   the date the trust was created
• the country where the trust is considered to be resident for tax purposes
• the place where the trust is administered
• a contact address for the trustees
• the full name and address of any advisers who are being paid to provide legal, financial or tax advice to the trustees in relation to the trust

For the TRS purposes, the lead trustee must keep the following records for all settlors, trustees and beneficiaries:

• the role of the person, i.e whether the person is a settlor, a trustee or a beneficiary
• full name
• National Insurance number or Unique Taxpayer Reference (UTR)
• date of birth
• postal address (or passport or ID card details, if the address is not in the UK)

If the trust sells or buys assets during the year, the trustees will need:

• completion statements for property transactions
• contract notes for stocks or shares
• receipts for sale or purchase expenses, including estate agent’s and solicitor’s charges on the sale of property and details of any Stamp Duty paid

If the trust owns property to let, the trustees will need:

• receipts for expenses connected with the property, including any mortgage interest
• annual bills such as business or water rates
• licence or rent agreements showing the rent payable

If the trust has received additional assets the trustees will  need:

• the amount or value of the asset received (use the asset’s market value on the date it was moved into the trust)
• the date the additional money or asset was received
• details of who made the payment or who moved the asset into trust

The trustees should also keep records that show any important decisions made by the trustees, such as:

• minutes of meetings
• deeds of appointment
• any decisions that affect the distribution of capital or income
• any decision not to register on the TRS and the relevant exemption which applies (if applicable)

If trustees make payments to beneficiaries, they must keep records of such income payments.

For full details of the above see the HMRC’s TRS Manual at TRSM50020.

Who can access trust records?

Trustees should  be aware that by law, the following UK law enforcement authorities can request information about the beneficial owners of all express trusts:

• HMRC
• National Crime Agency
• Financial Conduct Authority
• Serious Fraud Office
• Metropolitan Police Service
• City of London Police
• police forces in England and Wales outside of London
• Police Scotland
• Police Service of Northern Ireland

 

Conclusions

 

Whilst the above lists may seem daunting, what they really mean is that trustees need to keep proper records of all the parties to the trust and all the dealings with the trust. Which surely is only common sense.

 

Unfortunately, the latest available statistics on how many trusts have been registered under the TRS (published last October) only provide data from March 2023. According to the HMRC data, in the 12-month period ending on 31 March 2023 462,000 trusts and estates were registered on the TRS, compared to  just 33,000 registrations in the previous year (clearly largely due to the 1 September 2022 deadline). Approximately 90% of these were non-taxable trusts.
The total number of trusts registered at that date was 633,000 which is still well below the estimates of the total number of trusts that need to be registered.

 

Doubtless the numbers have increased since then and doubtless advisers will still be coming across trusts that should have been registered and have not but will have to be if a new business relationship is to be formed (such as the trustees wishing to invest the trust funds). It may be convenient to remind the trustees on such occasion of their record keeping duties. Next month I will consider some real-life cases where trust information was missing or incomplete, the problems this led to and what the solutions in such cases were.