To pay their Income Tax and Capital Gains Tax (CGT) liabilities, trustees must first obtain a Unique Taxpayer Reference (UTR). Previously, they would do this by completing a 41G form. The form required details of the settlor, type of trust (lifetime trust, Will or intestacy) and details of each trustee. The trustees complete their tax returns quoting the UTR.
In April 2017, HMRC announced it would stop using form 41G and launched an online trust register. This change is a part of the implementation of the Fourth Anti-Money Laundering Directive (4MLD). The directive is an update to anti-money laundering standards originating from the European Union.
The new register has a wider remit
Under 4MLD, HMRC is required to capture greater detail about trusts. The new register still provides a UTR to trustees, but has a wider remit to fulfil that requirement.
The register will capture;
- details of the trust assets, including addresses and values
- the identity of the settlor, trustees, protector - as well as any other persons exercising effective control over the trust.
- identity of the beneficiaries, or classes of beneficiary
To capture the identity, the following details are required;
- date of birth
- National Insurance number for UK residences - with the exception of minors
- address and passport / ID number for non-UK residents.
Regular updates to the register are required
The trustees, or their agent, must register the trust where UK tax is payable by the trustees. The register must be updated again in each tax year in which the trustees have to pay UK tax.
Trusts which already have previously registered via the 41G form will need to register again.
Responsibility varies according to trust type
The most common UK taxes that apply to trusts are income tax, capital gains and inheritance tax. However, the application of these taxes depends on the type of trust used. Registration is only required if the trustees are taxable.
Income arising within a bare trust is taxable on the beneficiary, not the trustees. The trustees will not need to register / update the register for income generated by the trust.
Capital gains tax
CGT arising within a bare trust is taxable on the beneficiary, not the trustees. The trustees will not need to register / update the register where a capital gain arises.
Bare trusts are not subject to the relevant property regime and so the trustees are not subject to the 10 yearly principle charge and exit charges.
Income arising within a discretionary trust is taxable on the trustees, even when that income is eventually distributed to a beneficiary. The trustees will need to register / update the register for income generated by the trust.
For Settlor included discretionary trusts (a discretionary trust where the Settlor can benefit), the Settlor is liable for tax on income arising within the trust. The trustees will not need to register / update the register for under a Settlor interested discretionary trust.
Capital gains tax
CGT arising with a discretionary trust is taxed on the trustees. The trustees will need to register / update the register where a capital gain arises.
Discretionary trusts are subject to the relevant property regime and are liable for the 10 yearly principle charge and exit charge. If tax is payable at these events, the trustees will need to register / update the register.
An entry charge applies where the transfer into trust exceeds the Settlor’s nil rate band. The tax can be paid by the Settlor or the Trustees. It is our understanding that the Trustees will only need to use the register where they pay the tax.
Interest in possession trust (IIP)
Income arising within an IIP trust is taxable on the trustees, the trustees will need to register / update the register for income generated by the trust. However, the trustees could instead mandate the income directly to the life tenant. In this scenario the trustees do not need to report the income and would not need to register / update the register
Capital gains tax
CGT arising with a (IIP) trust is taxed on the trustees. The trustees will need to register / update the register where a capital gain arises.
The IHT treatment of an IIP Trust changed considerably in March 2006. In general:
IIPs created before 22 March 2006 (where the beneficiaries have not been amended since April 2008), or created via a Will are ‘qualifying’ IIPs. These are not subject to the 10 yearly principle charge or exit charge.
IIPs created on or after 22 March 2006 are subject to the relevant property regime and are liable for the 10 yearly principle charge and exit charge. If tax is payable at these events, the trustees will need to register / update the register.
The changes in the treatment of IIPs in March 2006 are complex and further reading may be required. Old Mutual has produced a guide to assist with understanding these changes here.
Non UK trusts
Where both the trustees and the investment are not based in the UK, there will be no need to register the trust.
Where the investment is based in the UK, non UK resident trustees will need to use the register when they have a tax consequence.
A bond may reduce the reporting requirements
Using a bond could reduce the frequency which the Trustees have to update the register, or remove the need to use it completely.
A bond will only create a tax liability when a chargeable event occurs. For example, on full surrender or a partial withdrawal in excess of the 5% tax deferred allowance. Under chargeable event rules, a gain is taxable on the settlor of a discretionary trust / IIP trust during their lifetime and in the tax year of death. Only after this point would the trustees be taxable and be required to use the register.
Instead of creating any gains themselves, the trustees could consider assigning the bond to the beneficiaries to encash at their marginal rate of income tax. In this case, the trustees would only need to use the register if an Inheritance tax charge applies.
A full list of frequently asked questions has been published by HMRC has been published and can be accessed via this link.
The rules are changing in 2020
The European Union’s Fith Money Laundering Directive (5MLD) will introduce a requirement for all trusts to use the register. The directive has already been accepted by the UK and will go ahead regardless of the exit from the EU. The deadline for implementing the directive is March 2020. Further details are expected in the run up to the deadline.
Last updated: December 2018