Modernising Lasting Powers of Attorney

The Ministry of Justice (MoJ) and the Office of the Public Guardian (OPG) jointly initiated a project to modernise the process of making and registering lasting powers of attorney (LPAs) in England and Wales in November 2020. STEP was invited to sit on the Modernising Lasting Powers of Attorney (MLPA) stakeholder working group and has attended various workshops over the past six months to help shape and develop the consultation.

The consultation deadline recently passed on 13 October and STEP has submitted a formal response. The consultation seeks views on seven specific proposals that the government is considering and a summary follows below of STEP’s response to each proposal.

Proposal one: ‘Role of witness‘, considers the role and value of witnesses and how to keep that value.

The OPG proposes to remove the need for a witness and/or replace the witness with new safeguards that perform the same function. STEP strongly opposes the suggestion that the protection provided by witnesses offers little or no value to the process. LPAs should retain their status and safeguard as a legal deed with the requisite formalities, and all signatures should be witnessed by independent witnesses.

Proposal two: ‘Role of application’, considers the role of applying to register an LPA and who can apply.

We agree that there are benefits to the proposal to digitally check the registrations, particularly in reducing the chance of delay and rejection. We also feel strongly that a paper version and application process should remain available to the elderly or vulnerable who have no internet access or IT facilities. We stress that even if ID verification online is technologically robust, there will be a small demographic, usually the more elderly, that do not have access to a computer or smartphone for verification.

Proposal three: ‘OPG remit’, considers the OPG’s remit and examines how to widen it so that it can verify people’s identity and stop or delay an LPA’s registration if it has concerns about it.

We agree that there need to be more advanced identity checks for donors, which would consequently improve safeguards and reduce the chance of identity fraud and theft. We suggest that the OPG should require suitable identification for all parties to the LPA including passport details and address confirmation. We also advise that indemnity bond insurance, subject to a minimum value set at a relatively low amount by the OPG, should be in place for all attorneys in case of malfeasance, fraud or similar wrongdoing.

Proposal four: ‘How to object’, considers how people can object to an LPA and how to simplify the current process so people can more easily understand where to send objections and how to do so.

We agree with the proposal that anyone should be able to object to an LPA at any time. However, we have suggested that this course of action should be aligned with a signposting and public awareness campaign detailing the limits of attorneys’ powers.

Proposal five: ‘When to object’, considers when people can object and examines at what point and for how long objections can be made before an LPA is registered.

We suggest that the time should be shortened between an LPA being sent for registration and it being placed on the register. We propose that a two-week waiting period plus one week for processing would be appropriate with a total four-week deadline for an online or paper return.

Proposal six: ‘Speed of service’, considers the speed of the LPA service and whether a dedicated faster service should be introduced for people who need an LPA urgently.

We believe that an urgent service would provide additional benefits. If the service is implemented we suggest that the specific reason for the urgency should be shown, with a limited tick-box menu, and the requisite proof should be required by the OPG. However, we reinforce that if the overall registration period is reduced (proposal five) then the number of cases where urgent service would be required would be very low.

Proposal seven: ‘Solicitor access to the service’, considers solicitors’ access to the service.

The online service is welcomed, subject to the retained safeguards. However, the current inability to save the online deed to the relevant client file is a significant disadvantage to this system, and this needs to be addressed before this procedure becomes compulsory for practitioners. We understand that this service will be accessible by other professionals (not just solicitors), such as estate planners, will writers, charities, etc., which is important.

We also recommend that dropdown menus are included in the online deeds, including precedent clauses with wording approved by the OPG and the relevant expert professional bodies, to cover matters such as continuing to be able to use or to set up an investment management arrangement with a discretionary fund manager. This would benefit all, including lay applicants. STEP has also reinforced that it is essential that any new online system is securely piloted within the industry before it is implemented.

STEP’s full response to the consultation can be found here. We will keep members apprised of any further developments in this area.

Emily Deane TEP Technical Counsel


Trust Scotland Act 1921 centenary prompts call for reform

Emily Deane TEPThe Edinburgh Tax Network celebrated the 100th anniversary of the Trust Scotland Act 1921 by hosting a web event for stakeholders this week, which STEP attended. The centenary of the Principal Statute on 19 August has prompted the Scottish Law Commission to submit a draft bill for potential reform, the Trusts (Scotland) Bill, to the Scottish Parliament.

The web event panel consisted of Lady Ann Paton (Chair of the Scottish Law Commission), The Hon Lord Tyre and Lord Drummond-Young who discussed the overwhelming need for modernisation. They noted that current legislation has been heavily amended, making it convoluted and difficult to use, and much of the content is now largely obsolete.

The panel stressed that reform is essential in order to shape an innovative and high tech economy, comply with the more modern applications of trust law, and support businesses recovering from the pandemic.

The Scottish Law Commission’s proposals for reform include, but are not limited to, the following:

  1. recognition of trusts’ inherent simplicity and flexibility;
  2. appointment of Protectors;
  3. recognition of the commercial use of trusts. The current legislation fails to deal with commercial trusts, which have significantly developed in the last 40 years;
  4. express recognition of private purpose trusts;
  5. trustees’ powers should be flexible and wide, similar to a natural person managing his or her own affairs;
  6. courts given simplified and effective powers to deal with trust litigation;
  7. courts given power to remedy defects in the exercise of fiduciary powers;
  8. coherent provisions governing decision-making by trustees, beneficiaries’ information rights, delegation to agents, trustees’ liability for breach of trust and trustees’ liability to third parties.

The Scottish Law Commission’s review runs concurrently with the announcement of the Law Commission of England and Wales to reform trust law earlier this year under its 14th Programme of Law Reform. The EW review will focus on modernising legislation that has not been updated since 1925, and will explore modern and efficient structures in other jurisdictions to bring it up to international standards.

Both Law Commissions say it is essential to update trust legislation to uphold competitive economies and maintain their status as international financial centres.

STEP will continue to keep members apprised on both of these legislative developments.

Emily Deane TEP, STEP Technical Counsel

What are your views on a STEP testamentary capacity assessment course?

Emily Deane TEPSTEP is considering the development and implementation of an online testamentary capacity assessment course and is keen to assess members’ appetite and enthusiasm. With very little guidance or industry training currently available, an online course could be a valuable educational tool for anyone required to interact with capacity assessments.

The background to the course

In 2017 the Law Commission of England and Wales produced a consultation report on reform of the law of wills. While its work was postponed, it is likely to recommence early next year. Paragraph 2.132 of the report notes ’stakeholders have raised the possibility of introducing an accreditation scheme.. this would deal with the problems raised by the Golden Rule by directing testators and professionals towards people competent to undertake capacity assessments. An accreditation would mark out who could best assess capacity in difficult cases. Accreditation would also be persuasive in litigation should capacity be contested after the death of the testator…’.

It continued, ‘a scheme might be operated by a private organisation who would accredit lawyers, medical professionals and social workers to assess capacity… we recognise the value of private accreditation schemes’.

STEP believes it is exceptionally well-placed to offer its members an accredited scheme of this kind, if they would find it beneficial and valuable to their professional duties.

The proposed course

The course is likely to be webinar-based, comprising a series of interlinked sessions provided by relevant experts including solicitors, counsel and medics. Modules are likely to include:

  • Capacity – and the issues that affect it.
  • Law – the legal tests of testamentary capacity (for example considering the Banks v Goodfellow test in contrast to the Mental Capacity Act 2005 – and how these tests are treated by courts).
  • Practice – dealing with medics, matters to include in file notes, the importance of family trees, assessing clients.
  • The introduction of a standardised testamentary assessment questionnaire.

Other considerations are whether the course will be adapted for implementation across the common law jurisdictions, and whether completion will provide accreditation.

Join the debate

We would like to invite you to a free discussion on Wednesday 30 June at 4.30pm (BST) to explore the proposals for this course in more detail. Claire van Overdijk TEP (Chair of the STEP Mental Capacity Special Interest Group (SIG)) will moderate a panel discussion including Professor Robin Jacoby, Alexander Learmonth QC TEP, Australian neuropsychologist Dr Jane Lonie and Stephen Lawson TEP. The panel will discuss its views and there will be opportunities for questions.

Emily Deane TEP, STEP Technical Counsel

Invitation to STEP/Law Commission free webinar on its 14th Programme of Law Reform

Emily Deane TEPThe Law Commission of England and Wales has announced a public consultation on its 14th Programme of Law Reform and has published a scoping document providing background on the programme and ideas for potential projects.

STEP is hosting a joint webinar with the Law Commission on 19 May to discuss the proposals in further detail. The major areas of focus are:

The Wills Project, paused in 2017, will review the Wills Act 1837 to give it a radical overhaul, including possible reform of key principles of the legislation, modernising the language and reforming any ambiguities. Many consider that reform in this area is long overdue and there is a need to review testamentary capacity, statutory wills, supported will-making, the formalities, the protection of vulnerable testators, and of course digital aspects such as electronic signatures and execution. We understand that the Commission hopes to pick this project up again by early 2022.

The Trust Project will be an initial scoping study investigating problems with English trust law, with a view to modernising and updating it in line with international standards. It will explore the current limitations with trust law and examine how it could be updated to facilitate more competitive trust services in a global market.

The project will review alternative trust and trust-like structures available in other jurisdictions, for example, Jersey’s Foundation Law and Cayman’s Star Trusts, and will consider whether similar structures could be implemented. The project will also review the law governing certain categories of statutory trust, and identify technical trust law issues that may need general updating and reform.

The scoping document acknowledges that English trust law has not been comprehensively reviewed since 1925 and notes that Singapore and New Zealand have updated their laws and been creative in maintaining a healthy trust market, whilst other countries have implemented new trust and trust-like structures to meet demand.

The Commission has clarified that the trust project will not make recommendations regarding the taxation of trusts, for which HM Treasury has policy responsibility, and the project will therefore exclude the law of mistake which has significant tax consequences.

STEP members and non-members are welcome to join our free webinar on Wednesday 19 May at 4.30pm (BST) entitled ‘Modernising trust law for a global Britain’ in which we will explore the Law Commission’s 14th Programme of Law Reform with a specialist Law Commission and STEP panel.

Emily Deane TEP, STEP Technical Counsel

MoJ announces consultation on court fee increases

Emily Deane TEPThe UK Ministry of Justice (MoJ) has announced a public consultation on increasing selected court fees in line with historical inflation dating from August 2016 to April 2021, or from the year the fee was last amended (capped at August 2016).

The proposal is limited to fees which are under-recovering compared to the estimated cost of the service, and to fees which are enhanced so that they can legally be set above the cost of service. The impacted fees are included in the following fee orders:

  • Family Proceedings Fees Order 2008 No 1054 (43 impacted fees);
  • Civil Proceedings Fees Order 2008 No 1053 (67 impacted fees);
  • Court of Protection Fees Order 2007 No 1745 (3 impacted fees);
  • Magistrates Courts Fees Order 2008 No 1052 (20 impacted fees).

The proposed fee increases will raise an estimated additional net income of GBP11-17 million a year for HMCTS after fee remissions.

In addition to increasing fees, the government also proposes to widen access to the Help with Fees scheme. This includes raising the income thresholds in line with inflation, including the couple and child premiums, backdated to August 2016. The extended scheme is intended to benefit those who feature disproportionately among low income groups, including women, people from black and minority ethnic backgrounds, disabled people and younger people.

Responses are invited by 17 May. Feedback can be submitted via an online survey using the link below, by email: [email protected], or by post to: Fees Policy Team, Ministry of Justice, 102 Petty France, London SW1H 9AJ.

STEP will continue to keep members apprised of any developments.

Emily Deane TEP, STEP Technical Counsel

STEP attends FATF meeting to discuss beneficial ownership regime

Emily Deane TEPSTEP attended a virtual meeting held by the Financial Action Task Force (FATF) on 18 March to discuss potential amendments to FATF Standards Recommendation 24 and its implementation. FATF announced its intention to review this area, which may lead to a comprehensive overhaul of the system of beneficial ownership (BO), at a private sector consultative forum in November 2020.

The meeting aimed to garner additional views on the key proposals for amendment to Recommendation 24 from Designated Non-Financial Business and Professions (DNFBPs) which include lawyers, trust and company service providers, notaries and other independent legal professionals.

The principal issues for discussion included:

  • The verification of BO information provided to the registry and whether a DNFBP could hold the information instead.
  • Whether DNFBPs have sufficient access to the BO registries in order to identify and verify the relevant beneficial ownership information.
  • Whether physical paper bearer shares are still necessary?
  • How can the sector define and adequately control nominee arrangements?
  • How could the process of identifying beneficial ownership be improved?

STEP noted the issue that the application of the rules around beneficial ownership is complex, which can create an ambiguous outcome due to confusion around the identification of natural persons. This confusion can lead to the rules not being applied correctly, resulting in inaccurate information being held. Licensed third parties which are obliged to hold information, such as trust companies, have a more rigorous process of identification and this could be beneficial to adopt.

STEP suggested that FATF target the accuracy of the information held, its effectiveness, and how often it is collected. It also suggested it would be preferable for jurisdictions to have multiple options, rather than the current highly prescriptive rules of identification, to ensure the accuracy of the information collected and verified. The overarching objective for review should be to strengthen the measures in place, and mitigate the obstacles to transparency and risks of misuse.

FATF confirms that it will continue to consult with the private sector and will publish a full consultation on written proposals in June. STEP will continue to keep members apprised of these developments in due course.

Emily Deane TEP, STEP Technical Counsel

The OECD reviews the Common Reporting Standard

Emily Deane TEPHM Revenue & Customs (HMRC) invited some of the UK’s financial industry experts, including STEP, to join an overview of the OECD’s current review of the Common Reporting Standard (CRS).

The OECD will launch a consultation later this year, but has requested early input from industry experts on the improvements and changes that they would like to see. The purpose of the review is to enhance the general efficiency and operation of the CRS, and especially the quality and usability of its data.

In recent years there has been increasing use of innovative financial products that were not envisaged when the CRS was originally implemented. Some gaps and ambiguities in the legislation have been identified, and the OECD believes the time is now right to review and consolidate it. HMRC intends to consult the crypto-asset industry on technical changes and improvements and e-money industry experts, an area which was previously excluded, but some countries have called for it to be included in order to reach a single and consistent view.

HMRC also discussed some trust related issues for consultation, including:

Rules on reporting of joint accounts

While each joint account holder is required to report specific information, the schema does not recognise the number of account holders. HMRC suggests developing an indicator or flag to identify each individual account holder.

Controlling persons of passive non-financial entities (NFEs)

The schema is currently unable to assess the identity of the controlling person (ie settlor, protector) making the data less useful for tax risk purposes. HMRC suggests introducing  a mandatory field to specify the role of the controlling person.

Account holder where a trust is a financial institution (FI)

HMRC suggests the schema should be able to identify the type of equity interest the account holder has for risk assessment purposes.

Other trust-related issues that will be addressed in more detail include:

  • the treatment of reporting in relation to trustees, protectors and controllers;
  • inconsistent value reporting on the value of trust accounts;
  • reporting of trust loans as payments and potential avoidance issues;
  • consistency over reporting of issues on protectors and other ‘controllers’ who have no financial interests in the trust;
  • cross-over issues on reporting controllers – AML principles and FATF guidance;
  • reporting on ownership of corporate trustees in the context of controlling persons/equity interest holders;
  • relevance of cash as an asset in the context of classifying entities, particularly in the financial institution/passive NFE distinction.

HMRC has confirmed that it will form a focus group to look at the CRS and specific trust aspects, and we will keep members updated as the consultation progresses. In the meantime if members have any additional trust-related feedback please email the policy team at [email protected] by 1 February 2021.

Emily Deane TEP, STEP Technical Counsel

The UK replaces DAC6 with the OECD’s model Mandatory Disclosure Rules (MDR) post-Brexit

Emily Deane TEPThe disclosure of cross-border tax planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and requires reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks apply.

Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement (FTA), HMRC confirms that only arrangements that meet hallmarks under category D of DAC6 need to be reported in the UK, in accordance with the OECD’s Mandatory Disclosure Rules (MDR).

The regulations have been amended and laid before Parliament to ensure the rules work correctly post-Brexit, including ensuring that references to EU member States refer to the UK or an EU member State after the end of the transition period. The rules will now only apply to two types of arrangements captured within the category D hallmarks:

  • Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
  • Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
    • that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
    • are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
    • where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.

The replacement of DAC6 will significantly reduce reporting requirements although the disclosure of tax avoidance schemes (DOTAS) will continue to apply in the UK. It is also clear that under the terms of the FTA, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s MDR. While the UK has not implemented MDR in its domestic legislation the rules provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond it.

The government will begin to repeal the legislation implementing DAC6 in the UK and will implement the OECD’s MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax transparency. The government intends to consult on draft legislation to introduce MDR, and STEP will keep members apprised of the situation accordingly.

Update 6 January 2021: HMRC has confirmed to STEP that only arrangements which meet the hallmarks under Category D will now need to be reported, therefore historic reporting (for arrangements up to 31 December 2020) in respect of the other hallmarks will no longer be required.

Emily Deane TEP, STEP Technical Counsel

STEP welcomes UK government response to Fifth Anti-Money Laundering Directive consultation

Emily Deane TEPUpdate 11 August 2020: It remains unclear exactly when the proposed Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 will come into force as this is being created by way of a Statutory Instrument, which is subject to the sifting procedure in Parliament. This is a special procedure for EU legislation, and the date on which the regulations will come into force will only become clear once the procedure has been completed.

HM Revenue & Customs (HMRC) has confirmed that the date from which new business relationships and acquisitions of land have to be considered as part of the registration requirements under the regulations will be 21 days after the Statutory Instrument has been laid (see para 1(2) of the regulations).

The UK Parliament website shows the regulations as ‘laid’ on 15 July for the purpose of the sifting procedure, however this does not mean they have been ‘laid’ for the purposes of the commencement provisions in para 1(2) of the regulations. This can only happen after the sifting procedure has been completed. We will keep members updated once it is clear when the regulations will come into force.

Original blog: HMRC and HM Treasury (HMT) have published a response to the technical consultation ‘Fifth Money Laundering Directive and Trust Registration Service’. The consultation ran from January to February 2020 and sought views on how the Fifth Money Laundering Directive (5AMLD) should be transposed, and how certain processes could work for the expanded Trust Registration Service (TRS).

STEP submitted a consultation response and has held numerous meetings with HMRC and HMT over the last 18 months, on various issues related to the implementation of 5AMLD.

One of STEP’s outstanding concerns has been in relation to the interpretation of the business relationship point, which could have had an incredibly damaging effect on the use of UK professional service providers if interpreted in the same way as 4AMLD. We have been advising the government on the negative impact that a wide interpretation of the directive could have on the industry, and we are delighted to see that our recommendation has been accepted.

Para 2.15 of the consultation confirms that, ‘the government has opted to take a measured approach and will only require non-UK trusts to register on entering a business relationship with a UK obliged entity if the trust has at least one UK resident trustee. This means that non-UK trusts will not be required to register if their only link to the UK is through a business relationship with a UK based adviser.’

There is also a significant expansion of the categories of trust that will not need to be reported, which will ease the reporting burden on our members, although we were disappointed to note that bare trusts have not been exempted from registration as we would have liked. The government has also recognised that it would not be appropriate to require trusts created by will to register on the TRS if they are wound up within two years of death.

STEP also had concerns over the ‘legitimate interest’ application process, and the consultation confirms that it will aim to ensure that each request will be reviewed on its own merits, and access will be given only where there is evidence of money laundering or terrorist activity. We will continue to engage with the government on this issue.

The government has set a deadline of 10 March 2022 for existing trusts to register on the TRS, or to update their records if they have already done so. A 30-day deadline will be imposed for new trust registrations and updates. The regulations to implement the provisions have now been laid before Parliament for consideration.

We are very pleased that our discussions and papers have been taken into consideration so comprehensively, and we will continue to engage with the government on the remaining policy issues and assist with the development of the guidance.

 

Emily Deane TEP, STEP Technical Counsel

 

The five most common reporting errors for trusts to avoid

HM Revenue & Custom’s (HMRC) compliance team has identified the five most common errors made by UK administered trusts which are Financial Institutions (FIs) when fulfilling their obligations under the International Tax Compliance Regulations 2015.

These obligations relate to Automatic Exchange of Information (AEOI) which includes the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA). Any errors should be rectified by submitting amendments using an online HMRC AEOI account, or if relating to the FATCA FFI list, an IRS FATCA online account.

1.Trusts wrongly classified for AEOI purposes

A trust can be either a FI or a non-financial entity. A trust will be classified as an FI where more than 50 per cent of its income is from investing, reinvesting, or trading in financial assets, and another FI has discretionary authority to manage these assets wholly or in part. A trust or settlement is regarded as being managed by an FI where either one or more of the trustees is an FI or the trustees have appointed an FI, such as a discretionary fund manager, to manage the trust’s assets or the trust itself. Trusts that are FIs have to register and submit AEOI returns to HMRC if they have reportable accounts. More information.

2.Due diligence requirements incorrectly carried out

Trusts that are FIs must carry out due diligence on their financial accounts to determine whether any are reportable accounts.  For trusts, financial accounts are the debt or equity interests in the trust. The equity interests are deemed to be held by any person treated as a settlor or beneficiary of all or a portion of the trust, or any other person exercising ultimate effective control, including trustees and protectors.

The debt and equity interests of the trust are reportable accounts if they are held by a reportable person. For example, if a settlor or beneficiary is resident in a reportable jurisdiction (outside of the UK), their equity interest is a reportable account.

The trust that is an FI must apply the due diligence rules in order to determine the identity and residence of its debt and equity interest holders. Please see the due diligence rules.

A trust that has reportable accounts must report the account information and the financial activity for the year in respect of each reportable account. The account information includes the identifying information for each reportable person (such as name, address, jurisdiction of residence, taxpayer identification number, date of birth and account number), and the identifying information of the trust (name and identifying number).

3.Mistakes when reporting discretionary beneficiaries and trustees.

A discretionary beneficiary will only be treated as an account holder in the years in which it receives a distribution from the trust. Other reportable accounts are reportable regardless of whether a distribution is made in the calendar year. More information (para 253).

4.Reporting entities as controlling persons.

Where an equity interest (such as the interest held by a settlor, beneficiary or any other natural person exercising ultimate effective control over the trust) is held by an entity, the equity interest holder will instead be its controlling persons. As such, the trust will be required to look through a settlor, trustee, protector or beneficiary that is an entity to locate the relevant controlling persons. (This obligation corresponds to the obligation to identify the beneficial owners of a trust under anti money-laundering rules). More information (para 253).

5.Errors relating to the IRS FATCA Foreign Financial Institution (FFI) list.

A trust that registers on the IRS FATCA registration website as being a FFI, will receive a Global Intermediary Identification Number (GIIN) from the IRS, upon approval. Some UK administered trusts are incorrectly registered on the FFI list, including trusts that do not meet the definition of being an FFI, or that have already been terminated.

Where FFI registration has been approved but is no longer appropriate, the trust should cancel the agreement. Cancelling a registration agreement that is in approved status will mean it will no longer be published on the FFI List and the GIIN will no longer be valid. The FATCA registration user guide contains guidance on deregistration and cancelling the agreement.

 

Emily Deane TEP, STEP Technical Counsel