The key trust and estate issues from 2020 - Part I

However, considering the Government’s and Parliament’s justified preoccupation with the pandemic, quite a lot of legislation, as well as the introduction of certain new processes, happened as well.

This month we will consider the new rules on will execution and the expansion of the Trust Registration Service (TRS). Next month we will look at the introduction, or the expansion, of online processes for probate, powers of attorney, the Land Registry and the electronic execution of documents as well as some significant case law from 2020.

 

Will execution

In July 2020, acknowledging the problems surrounding will execution during the period of social distancing/self-isolation (namely the difficulties with complying with the English law requirement for two witnesses, who are physically present, for a will to be legally valid), the Government announced that witnessing a will via a video-link will be legal during the pandemic in England and Wales.

In Scotland, the Scottish Law Society introduced new guidance allowing for video-witnessing of wills in certain circumstances in April 2020.

The proposal for England and Wales was to amend the Wills Act 1837 to stipulate that where wills must be signed in the ‘presence’ of at least two witnesses, their presence can be either physical or virtual. Legislation implementing the proposal came into retrospective effect on 28 September 2020 in the form of the Statutory Instrument (SI) The Wills Act 1837 (Electronic Communications) (Amendment) (Coronavirus) Order 2020.

The key passage is in s.2 of the SI, amending s.9(b) of the Wills Act 1837 by the insertion of the following text: ‘For the purposes of paragraphs (c) and (d) [of s.9 of the 1837 Act] in relation to wills made on or after 31 January 2020 and on or before 31 January 2022, “presence” includes presence by means of videoconference or other visual transmission’.

So, the effect of this legislation is only temporary and after 31 January 2022, the execution of wills must again be made with witnesses who are physically present. The Ministry of Justice’s advice is that remote witnessing should only be used in an emergency when conventional witnessing is impossible, and extreme caution is required when using it. The Law Society also advises that video-witnessing should be used as a last resort.

So, currently, wills witnessed via zoom or skype will be deemed legal as long as the quality of the sound and video is sufficient to see and hear what is happening at the time; and as long as such wills are subsequently signed by the two witnesses using wet signatures. Electronic signatures are not permitted.

So, unfortunately, the new process is, in fact, quite complicated, the video-witnessing being only a part of the process. For a start, it is only the witnessing that can be done via a video-link and this alone will not suffice to make a valid will. Far from simplifying the issue, the need to subsequently post the will to each witness (who then needs to sign in wet ink and with a video-link to the testator) and then back to the testator (resulting in what has been referred to as a "well-travelled will") does not only pose practical problems, such as the possibility of the will being lost in the post or the process not completing before the testator dies, but there are also security and confidentiality issues. With a normal physical witnessing the witness only sees the last page of the will; under the new process the entire will is passed from person to person. Many people will not be happy with this!

 

Extension of the Trust Registration Service

While the online HMRC Trust Registration Service (TRS) went live in 2017, so far it has only affected those trusts that incur certain tax liabilities during a tax year. According to the latest available government statistics the TRS had 107,500 registrations as of 5^th March 2019, which represented an increase of 22,500 on the previous year. The number of trusts and estates completing self-assessment tax returns in 2018/19 was 151,000 (a fall from a figure of 154,500 in 2017/18). The numbers may be somewhat misleading and clearly are already out-of-date, for example, the number of interest in possession (IIP) trusts included in the statistics covers only those IIP trusts which complete self-assessment tax returns. So, for example, IIP trusts where all trust income was mandated to the beneficiary, and there were no capital gains to return, would not be included.

Doubtless, the figures will become more meaningful (and hugely greater) with the expansion of the compulsory TRS registration from next year to include certain trusts which have no actual tax liabilities. So, what exactly is this extension?

As mentioned in last month’s article, under the new rules enacted in the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 (SI 2020/991), which amended the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and which came into effect on 6 October 2020, even if there is no tax liability, almost all trusts set up during lifetime before 9 February 2022 (with some exceptions, see below), as well as certain will trusts, are due to be registered not later than on 10 March 2022, although HMRC has announced that this deadline is to be extended – see later. In addition, for trusts that are already registered, there will be a new requirement for additional information about the beneficiaries (see later). Trusts created after 8 February 2022 will have to register within 30 days.

Last month HMRC issued new guidance on the TRS extension, restating the rules set out in the above Regulations, which is available from the HMRC website.

The current deadline for registration under the new rules is 10 March 2022. However, given that the new IT system for the TRS is not yet ready, and so trustees cannot register non-taxpaying trusts under the new rules, HMRC has just advised that it intends to extend that deadline in order to provide trustees and agents of existing trusts with approximately 12 months in which to register from the date of IT delivery. This is expected to be sometime during Summer 2021 so the deadline for registration (yet to be announced) will be sometime in Summer 2022.

Here is an outline of the new rules as to which trusts will need to register and which will not.

 

UK resident trusts

All UK resident trusts (other than those which are specifically excluded – see below) will have to be registered on the TRS.

Excluded trusts (Schedule 3A excluded trusts) 

The types of trust (whether UK resident or non-UK resident) which will not have to be registered on the TRS include:

• Trusts that arise as a result of statutory requirements – for example, statutory trusts arising for minor children under the UK intestacy rules.
• Trusts created by, or to satisfy, a court order – for example, on divorce or the dissolution of a civil partnership.
• Pension scheme trusts.
• UK charitable trusts.
• Trusts for a bereaved minor (TBM) and “18-to-25” trusts, i.e. trusts set up under the will of a deceased parent of the child where the child will become absolutely entitled to the trust property on or before attaining the age of 25.
• Trusts created by a will which only holds assets forming part of the deceased’s estate and are wound up within two years of the deceased’s death.
• ‘Pilot’ trusts created before 6 October 2020 where the value of the property held by the trust does not exceed £100 (if further funds are added to the trust so that the trust fund exceeds £100 the trust will have to be registered at that point).
• Co-ownership trusts that exist where two or more people co-own an asset legally and beneficially for themselves (i.e the trustees and beneficiaries must be the same persons) – for example, a bank account or shareholding or jointly-owned UK
• Trusts of life assurance policies or policies solely for the payment of retirement or death benefits - which only pay out on the death, terminal illness, or permanent disablement of the insured; or to meet healthcare costs.
• Trusts holding only benefits received on the death of a life assured from a policy described immediately above, provided the benefits are paid out to beneficiaries within two years of the death of the life assured.
• Trusts incidental to commercial transactions.
• Authorised unit trusts.

Note, however, that if the trustees of a trust that falls within one of the above exclusions become liable for UK income tax, capital gains tax (CGT), inheritance tax (IHT), Stamp Duty Land Tax (SDLT) or Stamp Duty Reserve Tax (SDRT) the trust will need to be registered on the TRS in order for the required trust tax return to be issued.

 

Non-UK resident trusts 

The only non-UK resident express trusts which will have to register on the UK trust register are those where the trustees (in their capacity as trustees):

• acquire an interest in UK land; or
• enter into a new business relationship with an entity in the UK that is required to carry out customer due diligence checks in relation to the trust (e.g. a bank, lawyer, estate agent, accountant) where at least one of the trustees is UK resident and the beneficial-owner information in relation to the trust is not held on a central register in another EEA country; or
• are liable to UK tax on UK source income or UK

Non-UK resident trusts where all the trustees are non-UK resident and where the trust has no UK tax liability or directly-held UK assets will not have to register on the TRS simply because they enter into a business relationship with UK lawyers, banks, estate agents or accountants.

It will no doubt take some time for the impact of the rules to be fully understood as they are not always straightforward, especially in relation to trusts arising on death. For example, for will trusts, the exemption from registration will generally only apply if a will trust is wound up within two years from death unless the trust is a TBM or an “18-to-25” trust. On the other hand, statutory trusts arising on intestacy are wholly exempt (unless, of course, they actually become liable to tax). Another apparent anomaly is that pilot trusts, (such as “by-pass trusts” created with a nominal sum), are only exempt from registration if they were created before 6 October 2020.

It is also disappointing that there is no general exclusion for bare(absolute) trusts and nominee arrangements.

For financial advisers, the biggest change resulting from the TRS extension is the requirement to register trusts holding life assurance investment bonds which up to now have been excluded from registration until a chargeable event gain (ie a taxable event) arose. Clients holding such investments will no doubt need some assistance with compliance with their new obligations. Providers of bond/trust combinations are no doubt looking at ways to provide this assistance.

In addition to the extension of the categories of trust that need to be registered, there are additional requirements in relation to the information that needs to be provided, and this also affects trusts that are already registered. Namely, from 22 March 2022, the trustees will have to provide additional information about the beneficial owners and potential beneficiaries mentioned in a letter of wishes, i.e. their country of residence, nationality and the “nature and extent” of their beneficial interest (this is in addition to the information already required, i.e. the name, date of birth, National Insurance number and address.

One piece of good news was the clarification of the rules on “Access to information on the UK trust register”. HMRC has confirmed that it will provide beneficiary information to an outside party only if there is strong evidence to show that the trust could be linked to money laundering or terrorist financing, and it will not release information about beneficial owners who are either under age 18, lack mental capacity or at risk of criminal activity.

 

Comment

As far as the new rules for will execution are concerned the jury is still out. As mentioned in previous articles the proposals have been generally welcomed by practitioners, including the Law Society and STEP. However, many do foresee the potential for an increase in disputes and indeed some question the extent to which this change may be useful, given the requirements for technology (other than when the witnessing is organised by a solicitor) as well as the need for the witnesses to still attest the actual wills in wet ink. Furthermore, as seen on many occasions last year, the arrival of Deepfake on the scene has meant that the danger of falsification with a video-witnessed will is potentially even greater than with a will witnessed in the old-fashioned way.

What would simplify matters would be the introduction of a secure fully electronic system. However, the Government has decided not to allow electronic signatures as part of this temporary legislation due to the risks of undue influence or fraud against the person making the will which were identified by the Law Commission in its 2017 consultation paper on wills. The Law Commission is still considering the possibility of allowing electronic wills in the future.

So, while there is very little evidence that anyone is using this new system of video-witnessing at all, there is frankly a suspicion that it was introduced using the form of logic which originated from “Yes, Minister” and which goes: “we need to do something, this is something so we must do this”, without really having thought it through. Let’s hope that the Law Commission will in due course come up with a more sensible solution.

As for the TRS extension, then given the forthcoming new obligations on many trustees, even if there is no way as yet to actually register a non-taxpaying trust, and even with the proposed extension of the deadline for registration, advisers and trustees should be considering this and collating the relevant information.

Next month we will consider the 2020 developments in relation to online trusts, online Land Registry, online probate and online powers of attorney. Is there going to be online everything soon enough?