The future of the Trust Registration Service

Emily Deane TEPSTEP attended a meeting with HM Revenue & Customs (HMRC) and HM Treasury (HMT) last month to discuss the operation of the Trust Registration Service (TRS) and its progress, and the implementation of the EU’s Fifth Anti-Money Laundering Directive (5MLD). The following feedback was provided.

Operation of TRS

The TRS GOV.UK guidance should be published by the end of June 2018. The 22 November FAQs (hosted on STEP’s website) will not be updated in the meantime.

HMRC has allocated a 15-month timeframe to enhance the online functionality and make it more efficient for future service. It will be seeking volunteers to assist with piloting the new system shortly.

In situations where non-resident trustees have bought a UK property (and paid Stamp Duty Land Tax – SDLT), but have no UK income tax or capital gains, they should not be receiving demands for four years’ tax returns from HMRC. This will be addressed.

Named beneficiaries must be identified on the TRS, which is part of the EU Directive, and HMRC is constrained on this point.

HMRC is aware of the issue where the system requires the Unique Tax Reference (UTR), trust name or postcode to be matched to HMRC’s records, and access is being denied.

Delays to UTRs being received following registration of trusts and complex estates are being investigated.

HMRC will endeavour to produce more guidance on complex estates in the GOV.UK guidance.

The paper and online system will be amalgamated as soon as is practical.

HMRC is aware of the widespread dissatisfaction around the penalties, and has confirmed that it will take a soft approach this year.

HMRC introduced dummy variables to enable registration to proceed on the TRS, but will no longer accept them.

There will be no more trust registration deadline extensions in 2018.

HMRC is considering changing the March deadline to align with the Self-Assessment deadline, 31 March or 5 April.

The 28-day period to save and return data will be reviewed, and possibly extended.

The functionality is still not available to complete Q20 on the SA900, which should be left blank.

EU 5MLD

The EU’s 5MLD will extend the TRS to all UK express trusts and non-EU trusts that own UK real estate or have a business relationship with a UK Obliged Entity. The new Directive will require HMRC to share the trust data with Obliged Entities and anyone with a ‘legitimate interest’ – the latter term will be defined in full in due course. STEP is liaising with HMT on this.

HMT is planning to publish a policy consultation in winter 2018/19* that will last for eight weeks, followed by a consultation on draft legislation in spring 2019* that will last for four weeks.

5MLD is expected to come into law at EU level later in June 2018, with a transposition deadline of around December 2019, and an implementation deadline of around February 2020.

STEP will keep members apprised of any further developments.

*corrected date

Emily Deane TEP is STEP Technical Counsel

UK agrees company public registers for Overseas Territories

Daniel NesbittThe UK government has accepted an amendment to the Sanctions and Anti-Money Laundering Bill which requires the Overseas Territories to establish public registers showing the beneficial ownership of companies.

The amendment, introduced by Labour’s Margaret Hodge and backed by MPs from all the major parties, commits the government to assisting the Overseas Territories in setting up registers by 31 December 2020. If registers have not been established by the deadline, the UK will be required to legislate to impose them.

An amendment which would have extended similar provisions to the Crown Dependencies was not backed by the government and was subsequently withdrawn.

The developments come after a government amendment which would have only required public registers if the Financial Action Task Force recommended them, was not selected for debate by the Speaker.

Debates on the Bill are scheduled to finish on 1 May 2018, and following Royal Assent, it will become law.

STEP will continue to monitor the impact this amendment will have, and will provide further updates where necessary.

Daniel Nesbitt, Policy Executive, STEP 

STEP Bahamas reports to the FATF Forum in Vienna

Vienna united nationsSTEP was invited to attend the Financial Action Task Force (FATF) Private Sector Consultative Forum in Vienna on 23-24 April.

The event consisted of several breakout sessions relating to FATF’s global priorities for Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) in 2018.

As part of the Forum, Cecil Ferguson TEP, Chair of STEP Bahamas and Bank Examiner of the Central Bank of the Bahamas, which is responsible for licensing, regulating and supervising financial institutions, was invited to report to attendees on the progress of the National Risk Assessment (NRA) in the Bahamas.

Cecil reported that the NRA process in the Bahamas had been very collaborative in nature, with participation from the public, private and NGO sectors. The country had embarked on a course to implement FATF’s Recommendation 1, with all sectors identifying key risk areas and resources allocated to the highly-exposed areas. A national co-ordinator was appointed to take responsibility for the process.

There were two elements to the money laundering and terrorist financing risk assessment at the country level, as well as at the financial institution and Designated Non-Financial Businesses and Professions (DNFP) level. The Bahamas engaged with the World Bank’s technical risk-assessment expert to assist in the initial process.

The process served to enhance and deepen the understanding of the Bahamas’ money laundering and terrorist financing threats and vulnerabilities, and focus its resources to address gaps in its AML/CFT regime. This included amending primary laws, regulations and guidelines as well as supervisory enforcement and frameworks.

Cecil concluded that the Bahamas’ NRA was adopted by the Cabinet in December 2017 and it has established a working group meeting weekly to ensure that the outcomes continue to be addressed.

STEP representatives also attended a closed session drafting group for lawyers, accountants and trust and corporate service providers (TCSPs) to discuss FATF’s Risk-Based Approach guidance. The review included discussions around the sectoral guidance of 2008 and potential areas of improvement focusing on beneficial ownership, suspicious transaction reporting obligations, terrorist financing risk indicators, and ongoing customer due diligence measures.

STEP will continue to engage on these issues with FATF and report back accordingly.

Emily Deane TEP is STEP Technical Counsel

How to win a STEP Private Client Award

George HodgsonEntries are open for the 2018/19 STEP Private Client Awards until 31 May 2018. The Awards are widely acknowledged as being one of the premier events in the private client industry calendar. Winning an Award is also a very clear and recognised hallmark of excellence.

How then, do you go about winning an Award?

Enter
The Awards are free to enter (we simply ask entrants to consider a donation to charity) and open to all firms and practitioners in the industry.

There can sometimes be a perception that the Awards are only for larger firms, but almost every year smaller firms impress the judges by demonstrating innovation, an exceptional focus on a particular area or an outstanding rapport with their clients. Applications from all sizes and types of firm are therefore welcome.

Similarly potential entrants away from the major industry centres sometimes feel they might be disadvantaged. The judges for the awards are nevertheless increasingly international and drawn from across the spectrum of the private client industry. Strong entries will always attract attention from the judges, wherever they originate from.

Don’t just copy and paste from marketing materials!
You will be judged by fellow senior industry professionals and the language and tone of your entry needs to reflect that fact. Cutting and pasting from your website or marketing material will usually not impress the judges. Neither will excessive use of superlatives and hyperbole. What will go down well is an evidence-based entry that gives a clear exposition of what the firm has done over the past year to make it stand out from the crowd.

Apply for the right award
It is a constant surprise to the judges how many firms enter the wrong category. One submission even began with the bold statement: ‘We are a leading (another category all together) firm…’. Read the category criteria carefully, and if you think the judges might have difficulty understanding why you are applying for a particular category, help them by explaining your business better.

Answer the questions
Probably the most common reason for submissions going by the wayside is that the judges feel that the questions and criteria laid down in the Awards entry pack have not been answered. It is standard advice to every student sitting an exam to read the questions carefully and make sure you answer them. The same holds true for anyone drafting a submission for a Private Client Award. There are typically five criteria on which each award will be judged. Judges are asked to score entries on each of those criteria, with each carrying equal weighting. If your entry does not cover one of the criteria, you are likely to be penalised.

Give examples and evidence
Solid evidence and real examples demonstrating why you think your firm deserves an Award always go down well with the judges. To illustrate, most entrants in most categories claim to be ‘client-focused’, but some give real-life examples of how they achieve this and what they have done to go that extra mile for their clients. This attracts the judges’ attention far more than a simple assertion.

Be consistent
The judges are both curious and cynical in equal measure. They will check what you say in your submission against what you say on your website and other sources of information. Glaring inconsistencies tend to result in entries receiving relatively short shrift.

Know your (word) limits
Brevity is a strength, but submissions sometimes fall by the wayside because there is little clear detail on key issues and yet the submission is significantly below the 1,100-word limit. Equally, don’t go over your 1,100 words: the judges have a lot of entries to read!

Remember we are choosing ‘Xxx of the Year’
Your firm may well be successful and very good at what it does, but the Awards are intended to highlight those that have achieved particular success over the past year. General statements about historic successes are therefore far less relevant than what you have actually achieved over the past 12 months (1 June 2017 – 31 May 2018) .

From the above it is probably clear the STEP Private Client Awards are very competitive. Submissions across the board are usually of a very high standard. That is why the Awards remain so prestigious and the Awards Ceremony on 7 November 2018 remains one of the networking highlights of the year for many senior practitioners.

George Hodgson is Chief Executive of STEP.

Think you’re covered with a statutory notice? Watch out for a DWP claim

Emily Deane TEPUpdate 30 May 2018: STEP has liaised with the DWP on this technical issue. It has been referred to its legal team for clarity, and we will keep you updated when we receive a response.

If you work in the probate field you will be very familiar with the process of submitting a statutory advertisement, (under the Trustee Act 1925 for England, or the Trustee Act 1958 in Northern Ireland) in The Gazette and a local newspaper, following the receipt of the grant of representation.

A statutory notice is a published advertisement giving notice of the personal representatives’ intention to distribute the deceased’s estate. The objective is to ensure that sufficient effort has been made to locate creditors, prior to distributing the estate to the beneficiaries, whilst safeguarding the executor or trustee from becoming personally liable from any unidentified creditors. If a notice is not submitted and a creditor subsequently makes a claim after the estate has been distributed, then the executor or trustee may become personally liable for any unidentified debts.

The notice gives creditors and anyone else who may have an ‘interest’ in the estate up to two months to make a claim via the personal representatives, although they do not affect the right of certain people to bring a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Once the notices have expired the personal representatives may then distribute the estate, knowing that they will not be personally liable should claims or debts of the deceased become payable. Therefore, it is prudent and good practice that no significant distributions should be made from the estate before the statutory notices have expired.

An exception for the DWP

However, not all advisors are aware that if you have already paid the beneficiaries their entitlements from the estate, and you subsequently receive a letter from the UK Department for Work & Pensions (DWP) about a claim, then you are not protected by the statutory notice.

In these circumstances you will need to contact the beneficiaries to explain that some money may need to be reimbursed to the DWP, and that they should return the money they have been given, pending the outcome of the enquiry. Clearly this scenario causes dissatisfaction for the beneficiaries, as well as delay and potential costs to the advisor.

Terry Moore TEP of Burstalls in Hull initially brought this to STEP’s attention. STEP’s UK Practice Committee has subsequently raised the lack of awareness around this issue and written to the DWP pointing out the difficulties it presents, and the length of time it often takes to receive a repayment request. STEP will report back in due course.

Emily Deane TEP is STEP Technical Counsel

Top 10 FATCA/CRS reporting issues

Top 10 issuesWith reporting now underway in the UK for both FATCA (the US Foreign Account Tax Compliance Act) and the Common Reporting Standard (CRS), STEP has been liaising with HMRC on some of the more common reporting issues:

1. The financial institution (FI) has to re-register and is not able to view previous returns on the portal, because login details are unknown following staff changes.

Automatic Exchange of Information (AEOI) portal login details should be held securely and known only by those who need them. The FI should ensure that there is an appropriate procedure to maintain access to their portal. A pseudo email account might be an appropriate solution, providing the FI has robust security and data protection safeguards in place.

2. The FI misunderstands what constitutes an undocumented account.

HMRC has advised that FIs are wrongly reporting accounts as ‘undocumented’ when a self-certification requested from an account holder has not been completed. This has led to numerous accounts being erroneously reported with a GB resident country code. The definition of an undocumented account can be found at IEIM403100.

3. The FI makes a submission using the XML schema which is rejected due to inappropriate re-use of MessageRef, FIReturnRef and AccountRef.

The schema guidance gives comprehensive advice on use of references and can be found here.

4. The FI reports accounts where the account holder is not resident in a reportable jurisdiction.

Individuals who are not resident in a reportable jurisdiction (see IEIM402340) should not be reported. Some jurisdictions which have signed up to CRS are non-reciprocal, and some which have signed up are not yet ready to receive exchanges.

5. The FI reports accounts as being NPFFIs but resident country code is not US.

The term non-participating foreign financial institution (NPFFI) is for FATCA only, in respect of years up to 2016, and not applicable for CRS purposes. If used, the resident country code should be US.

6. The FI reports accounts that are excluded accounts and therefore non-reportable, such as registered pension schemes.

A full list of excluded accounts can be found at IEIM 401720.

7. The FI reports persons who are not reportable.

Under CRS, corporations with regularly traded stock and related entities are not reportable account holders, nor are governmental entities, international organisations, central banks or financial institutions. A list of exemptions to the term ‘specified US person’ under FATCA can be found in Article 1 (gg) of the UK-US Inter-Governmental Agreement (IGA).

8. The FI reports joint individual accounts as entity accounts.

A jointly-held individual account is not an entity account and the account information to be exchanged can be found at IEIM402140. However, partnerships, including general partnerships, are treated as entities, irrespective of their legal form (see IEIM400860).

9. The AEOI enquiry helpline is for financial institutions only.

HMRC requests that you don’t share details of the AEOI enquiry helpline with your account holders. This inundates its AEOI filing team and prevents it from being able to assist FIs with their reporting obligations.

10. The FI leaves filing to the last minute.

Filing submissions sufficiently in advance of the 31 May 2018 deadline allows FIs extra time to deal with any unexpected issues such as missing information, or inaccurate XML schema, that might lead to the submission being rejected.

STEP will continue to consult with HMRC on ongoing technical issues.

Emily Deane TEP is STEP Technical Counsel

The Gift Aid tax gap

Emily Deane TEPSTEP is working with HMRC on a Gift Aid working group set up to explore options to maximise the amount of Gift Aid that charities can claim on donations, together with ways of increasing customer understanding of the system and how it works. HMRC is also investigating opportunities to improve the way that Higher Rate Relief is claimed; and whether it works as intended, is future-proof and provides the relief in the best way possible.

HMRC began the process by instructing an external research company to look into charitable giving and the use of Gift Aid. Its specific objectives were to estimate the value of the Gift Aid tax gap and unclaimed Gift Aid, and develop an understanding of correct and incorrect behaviours among donors.

The report has found that 25 per cent of the value of donations made in the 12 months prior to interview did not have Gift Aid added to them where the donor was eligible, contributing up to GBP560 million to the value of unclaimed Gift Aid. This represents potential missed income for charities and is generated by eligible donors who only sometimes (30 per cent), or never (18 per cent), add Gift Aid to their donations. It is mostly driven by a lack of opportunity for donors to add Gift Aid, and to a lesser degree, by failing to understand what Gift Aid is, or where they are eligible to add it.

The report also finds that 8 per cent of the value of donations had Gift Aid incorrectly added to them by ineligible donors, generating a Gift Aid tax gap of up to GBP180 million. This is caused by ineligible donors who always (5 per cent) or sometimes (10 per cent) add Gift Aid, partly where they do not understand the relief, and partly where they misunderstand what it means to be a taxpayer. This has resulted in donors who are not taxpayers attempting to add Gift Aid, where they are not eligible to do so.

Better understanding of these issues would lead to a drop in Gift Aid claims among ineligible donors, and a rise in claims among eligible donors. It was recommended to provide information about (1) Gift Aid eligibility criteria (ie clarifying what it means to be a UK taxpayer, and that the donor must be one to add Gift Aid to their donation) at every opportunity, and (2) the benefits of Gift Aid at the point of donation; to help effect the change.

The report, Charitable giving and Gift Aid research, is published today, accompanied by a press release issued by HM Treasury and HMRC.

If you have any questions or suggestions please email STEP’s Technical Counsel – Emily.Deane@step.org.

Emily Deane TEP is STEP Technical Counsel

EU finance ministers approve changes to blacklist

Daniel NesbittWhen the European Union announced its blacklist of jurisdictions judged not to be cooperative on tax in December 2017 it granted several nations in the Caribbean extra time to change their tax systems to meet EU standards. That revised deadline has now passed and the EU’s finance ministers have approved a number of changes.

The following jurisdictions have been added to the blacklist:

• The Bahamas.
• The US Virgin Islands.
• Saint Kitts and Nevis.

As well as approving the additions ministers have removed Bahrain, the Marshall Islands and Saint Lucia from the list.

American Samoa, Guam, Namibia, Palau, Samoa and Trinidad and Tobago will remain on the blacklist.

A further four Caribbean jurisdictions have been placed on the grey-list of countries that have pledged to alter their practices:

• Anguilla.
• The British Virgin Islands.
• Dominica.
• Antigua and Barbuda.

One further jurisdiction, the Turks and Caicos Islands, has been given until 31 March 2018 to respond to the EU’s concerns.

STEP will continue to monitor the development of both the blacklist and the grey-list and will provide further updates when appropriate.

Daniel Nesbitt, Policy Executive, STEP 

HMRC announces trustees, NOT agents, will be liable for penalties

HMRCUpdate 23 March: HMRC has updated its guidance to clarify that if a penalty is payable for late registration, it will be the burden of the lead trustee and not the agent.

We received the following communication from HMRC on 5 March 2018:

‘On 8 December 2017, HMRC announced that while the 31 January 2018 deadline for making a Trust Registration Service (TRS) return would remain in place, we would not charge a penalty if the lead trustees failed to register their trust on the TRS before 31 January 2018 but no later than 5 March 2018.

HMRC will not automatically charge penalties for late TRS returns. Instead we will take a pragmatic and risk-based approach to charging penalties, particularly where it is clear that trustees have made every reasonable effort to meet their obligations under the regulations. We will also take into account that this is the first year in which trustees have had to meet the registration obligations.

While our information suggests that most TRS returns have been filed, if you have not yet completed your TRS registration(s), you should do so as soon as possible.

When penalties can be issued

Penalties can be charged for administrative offences relating to a relevant requirement.

These are:

• a requirement to register using the TRS by the due date of 31 January after the end of the tax year in which the trustees pay tax on trust assets or income and
• a requirement to notify any change of information by the due date of 31 January after the end of the tax year in which the trustees pay tax on trust assets or income.

The administrative offences penalty

HMRC will charge a fixed penalty to reflect the period of delay:
• Registration made up to three months from the due date – £100 penalty
• Registration made three to six months after the due date – £200 penalty
• Registration more than six months late – either 5% of the tax liability or £300 penalty, whichever is the greater sum.

There is currently no facility to notify HMRC of any change of information online and, as such, we will not charge penalties for a contravention of this requirement until the online function is available.

A penalty will not be payable if we are satisfied you took reasonable steps to comply with the regulations.

HMRC also has the power to apply a penalty for money laundering offences under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017/692.

These offences are more serious than administrative offences. HMRC will not bring these penalties in immediately. HMRC will consult on the structure of these penalties later this year, to ensure the penalty regime is fair and proportionate whilst cracking down on money laundering offences.’

It had been unclear, following this communication, whether the penalties would apply to the person dealing with the trust’s registration affairs, whether that be the lead trustee or the agent. HMRC has now confirmed that the lead trustee will become liable for the penalty, and not the agent.

HMRC has also confirmed to STEP that in scenarios where trusts have an income tax or CGT liability for previous years but are not registered for self-assessment then trustees do not need a Unique Tax Reference for this process, and HMRC recommends that the trustees submit an IHT100 as soon as possible.

Emily Deane TEP is STEP Technical Counsel

Reviewing the New Zealand Property (Relationships) Act: have your say

New ZealandYou might not know it, but New Zealanders have a love affair with trusts. NZ practitioners probably won’t be surprised to hear that there may be anywhere between 300,000 to 500,000 trusts in the country, one of the highest per capita rates in the world.

But trusts can lead to unfair outcomes when a relationship ends. As a general rule, trust property isn’t divided equally between the partners. It’s only divisible to the extent that each partner is a beneficiary of the trust, and has a vested or contingent interest in the trust property. That means the Property (Relationships) Act 1976 (PRA) doesn’t apply to a lot of the property used and enjoyed by New Zealand families.

While the law does offer some remedies, there are issues with those too. Sections 44 and 44C of the PRA are limited, and the proliferation of alternative remedies to attack trusts is making it difficult for practitioners to provide advice. Many people argue that the PRA should deal with trusts more effectively, and on a clearer and more principled basis.

Our preliminary view is that the PRA doesn’t strike the right balance between the preservation of trusts and enabling a just division of property at the end of a relationship. Unfortunately there’s no ‘silver bullet’ solution. So we’ve presented four options for reform in our paper, Dividing relationship property – Time for change? Te mātatoha rawa tokorau – Kua eke te wā?

1. Change the PRA’s definition of ‘property’ to include any interest under a trust through which it is both likely and permissible that the partner will receive a distribution of trust property. This may include a partner’s power of appointment if they can exercise it in their own favour. Option 1 would mean that qualifying discretionary beneficial interests could be treated like any other item of property under the PRA.

2. Change the PRA’s definition of ‘relationship property’ to include the value of trust property attributable to the relationship if the court considers it just. The focus of this option is on the character of the underlying trust assets rather than option 1’s focus on the nature of the partner’s beneficial interest in the trust. It seeks to bring trust property into the relationship property pool when that property has the character of relationship property. The court would, however, retain discretion to prevent sharing of the trust property when the partners have genuinely, and with informed consent, alienated the trust property for the benefit of third party beneficiaries.

3. Broaden section 44C to overcome its main limitations. This would include changes to remove the requirements that the disposition be of relationship property and that it must occur after the relationship began. Section 44C(2) would be expanded so that the court may order the trustees to pay to one partner a sum of money from the trust property or transfer to a partner any property from the trust. The matters the court must take into account in exercising its powers under section 44C(2) could also be expanded. These changes would give section 44C a much wider application.

4. A new provision modelled on section 182 of the Family Proceedings Act 1980. Section 182 has proven to be a useful provision that gives effect to the original expectations of people that settle trusts and deals with injustice that could otherwise be caused by changed circumstances. But it needs to be enlarged to apply to de facto relationships as well as marriages and civil unions, and there’s a case for bringing it into the PRA.

There will be varying degrees of support for, and opposition to, the options above. That’s why it’s so important for you as STEP members to have your say. Please visit our consultation website below and tell us how you think the law should be reformed. Part G of our issues paper is dedicated to what should happen to property held on trusts.

Reviewing the Property (Relationships) Act

Please email your submission to pra@lawcom.govt.nz by 7 February 2018

Helen McQueen, Commissioner, New Zealand Law Commission