The Trust Registration Service (TRS) was created in 2017 as part of an EU Anti-Money-Laundering Directive (the 4th Money-Laundering Directive). Even though the UK has withdrawn from the European Union, as part of the Brexit withdrawal agreement, it was agreed that the TRS would be maintained. The idea is simple, to help combat money laundering, serious crime and the financing of terrorism. Consequently, all UK express trusts liable to pay tax in the UK were legally obliged to register.
New rules introduced on 6 October 2020
On 6 October 2020, as a consequence of the 5th Money-Laundering Directive, the rules dictating registration with the TRS were updated. The legal obligation for registration is now extended to cover the following:-
- All UK express trusts
- Non-UK express trusts
- Bare trusts
- Some complex estates
Before we look at the impact on property ownership and the TRS, it is essential to note there are still some trusts excluded from registration. These include:-
- Trusts imposed by statute
- Trusts created by court order
- UK registered pension trusts
- Trusts used to hold life, retirement or health policies
- Trusts used to hold insurance policy benefits
- Charitable trusts
- Pilot trusts holding no more than £100
- Will trusts
- Property co-ownership trusts, where the trustees and beneficiaries are the same
- Financial/commercial trusts set up in the course of professional services/business transactions
- Child bank accounts held in trust, holding cash but no investments
- Trusts holding funds for vulnerable people/bereaved minors
- Personal injury trusts
At first glance, the list of exemptions may seem complex but it is relatively straightforward. By removing relatively simple trusts in the equation, this allows the authorities to focus on larger more complex trust. As a result of the changes, non-exempt trusts in existence on or after 6 October 2020 are obliged to register with the TRS by the later of:-
- 1 September 2022
- 90 days from when registration is triggered
Now that we have established which trusts are covered and which are exempt, we will now take a look at the information required by the TRS.
Information required when registering a trust
To fulfil their legal obligations, trustees must provide the following information to the TRS:-
Initially, where a beneficiary is not named individually, perhaps part of a class group, their details will not be required. However, when they receive financial/non-financial benefits from the trust, and they are identifiable at this point, their identity will need to be revealed to the TRS.
How does the TRS impact property trusts?
In recent times, trust laws have been used to mask the underlying ownership of property and land. This was a prevalent method for overseas investors looking to acquire property in the London property market. The update to TRS rules will now force many trusts holding property to register with the TRS. However, it is crucial to recognise the distinction between the legal owner and the beneficial owner.
The legal owner is named on the title deeds at the land register and can make decisions regarding the asset.
The beneficial owner is the person(s) entitled to income from the property or proceeds from the sale.
While the legal owner(s) have the power to sell the property, a valid deed (signed by all parties) needs to be registered with the land registry. This is done using an accompanying Form B which adds a restriction over the title deeds. Consequently, the non-legal owner will be made aware if the property is being sold.
Practical examples involving property
Now that we have set the groundwork, we will look at some common scenarios involving trusts and property and whether they need to register with the TRS.
Property held for children under the age of 18
Schedule 1(2) of the Trusts of Land and Appointment of Trustees Act 1996 covers legal protection of property held by two or more persons where at least one is under the age of 18. In this scenario, the property must be kept in trust by those over 18 for the benefit of themselves and those under 18. As this is a trust imposed by legislation, it would be exempt from TRS registration.
Joint ownership of property
Where property is held in joint ownership between two or more people over 18, as a bare trust, it would typically need to be registered. However, if the trustees (the legal owners) and the beneficiaries are the same, this would fit the conditions for exclusion. Consequently, there is no obligation to register with the TRS.
There is a specific condition for exclusion where there are more than four joint owners and more than four beneficiaries. Under existing legislation, the Land Registry legal title for a property can only define up to 4 parties. So, if we assume there are five beneficial owners, but only four are mentioned on the legal title, this trust would be excluded from registration.
However, if only three of the five owners were mentioned on the legal title, this trust would need to be registered. This is because one of the beneficial owners is not mentioned on the legal title; therefore, there is no official note of their beneficial interest.
Keeping a record of beneficial ownership
The ongoing tightening of TRS regulations is a means by which the authorities hope to record the beneficial ownership of property and other assets. Initially, only those bare trusts with a tax obligation were legally required to register details with the TRS. However, the circumstances have now been extended to include an array of situations where there is no immediate tax liability. This will allow the authorities to monitor properties and assets where legal owners differ from beneficial ones.
There will no doubt be further additions to the TRS regulations to combat potential money laundering and the non-payment of taxes. Since its inception, the regulations have been tweaked and adjusted numerous times to exempt an array of traditional activities involving trusts. At the same time, they are recognising and bringing more complex trust arrangements within the remit of the TRS. By shining a light on the use of trust deeds to manage assets and tax liabilities, the authorities hope to reduce potential abuses of the system.