What kind of Trust is it?

Now, however, with the requirement to register most trusts with HMRC using the Trusts Registration Service (TRS), whether the trustees have tax liabilities or not, there is a need to be more specific as to the type of trust one is dealing with. The main reason for this is that it is necessary for an adviser, before they enter into a “business relationship” with the trustees, to either obtain a copy of the TRS registration proof or know whether the trust in question is one of the “excluded” trusts, i.e. a trust that does not need to be registered unless it is also a taxable trust. The same, of course, applies to any life office, investment company, solicitors, accountants etc - these are all “obliged entities” for Money Laundering purposes.

The legal requirement for the TRS purposes is that only express trusts (which are not "excluded trusts") need to register. So, firstly you need to understand what an express trust is and, secondly, which of the trusts are “excluded” trusts. For the purpose of this article we will confine ourselves to the more typical trusts where trustees are holding funds available for investment or reinvestment, i.e. we will not cover trusts related to co-ownership of property, unauthorised unit trusts, employee trusts, pension scheme trusts or trusts holding protection life policies where the life assured is still alive.

Three types of trust for tax purposes

Generally speaking, for tax purposes any trust will either be a bare (absolute) trust, an interest in possession trust, or a discretionary trust.

To determine which of the above is the trust in question you need to look for certain clauses in the trust document dealing with entitlement to the trust income and/or capital.

When looking at a document which created a trust (e.g. a trust deed (or another instrument in writing) or a will) first look for any income direction. Does the trust say that the trustees must pay income to a named individual, or that someone is entitled to the income as it arises, or that the trust carries intermediate income, or does the trust say that the trustees can accumulate the income and only distribute it at their discretion? There will be, of course, some nuances and some more complex provisions but this will be a good start.
If there is a named beneficiary entitled to the trust income, the next question to ask is whether this person is also absolutely entitled to the trust capital or not. If the same person is entitled to both the income and the capital, you will have a bare trust. If not, it will be an interest in possession trust which could be a fixed life interest or a flexible power of appointment trust. For income tax purposes both are treated the same.

If there is no beneficiary entitled to the trust income, the trust will be a discretionary trust for tax purposes, regardless of other provisions. For example, the trust may provide for a beneficiary to become entitled to income and capital at a certain age (like many old fashioned A&M trusts) or give the trustees full discretion over the income and capital distributions. The latter (i.e. fully discretionary trusts) have been more popular since 2006, especially when looking at the type of "standard" trust provided by life offices for use with investment bonds.

So, these are the three basic types of trust for tax purposes. There will be other subcategories depending on the circumstances of the particular beneficiaries, for example trusts for those who are disabled or vulnerable will benefit from certain favourable tax provisions, but the starting point will be as above.

More types of trust for TRS purposes

While the above categorisation is essential to be able to give advice to the trustees, it is not enough to determine whether the trust in question needs to be registered on the TRS and, if so, that the adviser will need a proof of the registration before starting business relationship with the trustees (e.g. arranging for the trust funds to be invested with a particular provider).

This is where all the other, non-tax categories come into play.
The full set of exclusions are listed in Schedule 3A to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (legislation.gov.uk).

Here are some guidelines on how to approach the next step in deciding the type of trust for TRS purposes.

Is the trust an express trust?

Exactly a year ago I covered this in detail in my then published article. Briefly, what matters is whether the settlor intended to create a trust. In most cases it does not even have to be in writing.

The expanded HMRC TRS Manual includes a number of examples of express trusts and it is definitely worth referring to.

Conversely, if a trust is not an express trust, then it does not need to be registered. This would include trusts that come into being through the operation of the law (be it legislation or a Court decision) and that do not result from the clear intent or decision of a settlor to create a trust or similar legal arrangement.

The first category of a non-express trust for our purposes is a statutory trust, such as one arising on intestacy in England. Another is a trust created by a Court in matrimonial (divorce) proceedings. Such trusts do not have to be registered on the TRS if they are non-taxable.

What next for an express trust?

Here the adviser will need to ask several questions to determine whether the trust in question falls into the excluded category.

The following are the type of questions that may be useful for the most common exclusions:

• Was the trust set up in a will? If so, is the trust a TBM (trust for a bereaved minor) or an age 18-25 trust? If so, the trust is excluded from registration.
  
  For other will trusts, the question is: Did the testator die more than 2 years ago?
  
  If yes, the trust should be registered as a non-taxable trust on the TRS and proof of registration provided before accepting new investment. If not, the trust does not need to be registered until after 2 years from the date of death.
  
  One important point to remember is that if the beneficiaries under a will or intestacy create a Deed of Variation which includes a trust, the trust is created by the Deed of Variation and not by the will, so the exclusion from the TRS will not apply.
  
  
• The next useful question is whether the trust is for a disabled person. Here you need to know the conditions for such a trust to qualify for the exclusion. ‘Disabled person’ has the meaning given by Schedule 1A to the Finance Act 2005. This includes trusts established under the statutory provisions for trusts for disabled persons at s89 IHTA 1984 and Sch1C(3) TCGA 1992. These trusts are excluded from registration
  
  
• Next question: Is it a personal injury trust? Again, such a trust is excluded from registration provided that the trust funds came from payments made to a person as a result of a personal injury to them. The term ‘personal injury’ includes physical and mental injuries and includes accidental injuries; injuries due to deliberate or criminal acts; injuries due to clinical negligence and injuries due to industrial disease. The trust of funds must also be disregarded from capital under regulation 46(2) of, and paragraph 12 of Schedule 10 to, the Income Support (General) Regulations 1987.
  
  
• Where the trustees hold only the proceeds of a life insurance policy and want to invest these, the question to ask is whether the life insured died less than 2 years ago? This is because such a trust is excluded from registration until after 2 years from the date of death. After 2 years the trust should be registered as a non-taxable trust on the TRS and proof of registration provided before accepting any new investment.
  
  
• Finally, for those dealing with cross border arrangements, for example where there are some trustees who are resident outside of the UK, the question to ask is whether the trust was established in a European Economic Area (EEA) member state and is required to be registered on the equivalent beneficial ownership register of that member state. If so, there is no need to register on TRS. There is no statutory definition of ‘establishment’ for TRS purposes: a trust can be considered as established in an EEA member state for TRS purposes if that is where the trustees are resident or where the administration of the trust is carried out. If there is a trustee (one of the trustees) resident in a EEA country, they may be required to register the trust in that country but this is not enough to exempt them from UK registration, if in fact the trust is established in the UK. Trustees of trusts established in the UK should first determine whether the trust is required to register with TRS. If so, the trustees should register with TRS first.

Comment

When starting a new relationship with trustees, probably the easiest first question to ask is: has the trust been registered on the TRS already? If so, obtain a copy of the HMRC TRS Registration record (PDF) and that's all that's required for money laundering purposes.

If not, the next question will be: have the trustees had any tax liabilities of their own (e.g. income or gains taxed at the trust rates)? If so, the trust should be registered as a taxable trust on the TRS and a proof of registration provided before accepting new investment.

And always remember that any of the excluded trusts will need to be registered once it becomes a "taxable trust".

Once the TRS/due diligence aspect has been dealt with, the advice "proper" can begin, with looking at the trust terms and considering the trustees' and beneficiaries needs and objectives, before offering suitable investment advice.