Category Archives: HMRC

More record keeping for trusts in 2020?

Guidance on record keeping obligations as at 2019 can be found here: https://blackshawtax.com/2018/07/30/hmrc-guidance-on-trust-record-keeping/

The change

This is likely to change and become more onerous once the UK adopts the 5th EU anti-money laundering directive (“5thAML”). The number of trusts affected by this may increase tenfold to 2 million. It will include many dormant trusts simply holding land or other non-income producing assets that currently do not need to formally register. In many cases the trusts will not have cash resources to pay for professional help to complete the database requirements and trustees could face personal penalties for non-compliance.

One hope is that the HMRC trust register will be improved. The current version appears to have been programmed by someone who does not understand the concept of either a trust or a database!

Transparency

It may also lead to more transparency and information being available on trust asset ownership (which may be a good or bad thing, depending on ones views on privacy).

The use of trusts

As ever, it is worth remembering that trusts are a useful vehicle to protect assets, for example minors, vulnerable persons, plus inheritance tax and wills planning encouraged by the tax legislation.

Resources

The consultation can be found here: https://www.gov.uk/government/consultations/transposition-of-the-fifth-money-laundering-directive

The EU directive can be found here: https://eur-lex.europa.eu/eli/dir/2018/843/oj

HMRC guidance on trust record keeping

In July 2018, HMRC updated its guidance on trust record keeping. This is a mix of tax and anti-money laundering requirements.

Dormant trusts may not have to complete a tax return or trusts register but there are still record keeping obligations, such as under para 44 and 45 of the The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

I recommend that all trusts have an annual trust meeting, asset review and simple accounts (even if just one page). Whenever I am asked to advise on a historic trust problems (eg missed IHT charge) a common theme is lack of annual meetings and accounts.

Here is the HMRC website link https://www.gov.uk/guidance/trust-record-keeping-for-tax-purposes

And a PDF version safari-30-jul-2018-at-1021.pdf

5 April 2018 year end tax planning – in three minutes

A quick checklist before 5 April:

  1. Maximise ISA savings
  2. Review pension contributions
  3. Consider pension tax breaks for your children (even minors)?
  4. Use your capital gains tax allowance
  5. Use your £5k dividend 0% tax band (and note its reduction to £2k from 6 April 2018)
  6. 30% income tax relief, using EIS/VCT investments?
  7. Review and note gift aid tax relief
  8. Pay any outstanding 31 January 2018 tax before 2 March, to avoid a penalty
  9. Check your PAYE coding notice and benefits package
  10. Will your tax on rental income rise, due to the interest restrictions?
  11. Use personal allowances of spouse, children and grandchildren
  12. Are you paying high marginal rates of tax?
  13. Business – extract cash in a tax efficient way (salary, loan, dividend, rent, pension?)
  14. Trusts – create new ones; distributions from existing ones; close down old ones; do you need to complete the trusts register and keep sufficient records?
  15. Inheritance tax – gifts, update will or letter of wishes, create lasting power of attorney
  16. Get a fixed fee quote for your 2018 tax return
  17. Are you a Scottish or Welsh taxpayer?
  18. Are any overseas assets or income taxed correctly in the UK and overseas?
  19. Have you set up your online personal tax account with HMRC?
  20. Do you have a tax payment on account to make on 31 July 2018?

These are prompts rather than fine detail – for further information please contact me.

Trustee obligations and the HMRC Trusts Registration Service

All trustees need to retain more information on the settlor, trustees and beneficiaries. In addition certain trusts need to disclose details to HMRC.

[updates highlighted in orange]

These notes quickly became out of date, as HMRC struggle to provide a suitable service and extend deadlines/update guidance. As at January 2018, the registration service remains awful (almost as if HMRC do not understand basics of both trusts and databases). For further details please contact me, check the STEP forum and HMRC helpsheet.

ATT have provided a good guide here: https://www.att.org.uk/sites/default/files/The%20Trust%20Registration%20Service%2029%20November%202017%20ATT%20Technical%20Briefing%20note.pdf

Penalties

STEP have provided a note on penalties, which can be found here.

HMRC Trusts Registration Service

There is a trust registration service for new and old trusts. Trustees can register now. Agents will be able to do so by the end of October 2017. It replaces the form 41G(Trust).

Update: there was a HMRC webinar on this topic on 10 August, one due on 8 September 2017 and 17 November 2017.

New obligations on trustees

The legislation is contained in the The Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017, which came into force on 26 June 2017. This is part of the implementation of the EU Fourth Anti-Money Laundering Directive (4AML). A copy of the regulations can be found here.

Paragraphs 44 and 45 of the regulations are the key ones for trusts. The former requires trustees to keep written records of beneficial owners and provide those, if requested, when entering into business relationships or to law enforcement authorities. The latter requires HMRC to keep a register of certain trusts.

Which trusts need to register?

At the moment, it is just trusts with a UK tax consequence that need to register. The register is online only. It collects details of the settlor, trustees and beneficiaries. This includes date of birth, NI number (or address and passport number). It seems to require known discretionary beneficiaries to be logged, even if they have not (and may not) ever receive funds* from the trust. In some trusts, that could be a huge number of beneficiaries.

*Update: HMRC now appear to accept that that a beneficiary of an unnamed class (eg “the children of the settlor”) does not need to be provided until they receive funds.

The trigger for registration is “UK tax consequences*” which includes: income tax, capital gains tax, inheritance tax (eg 10 year or exit charge) and SDLT (eg buying land).

*Update: as noted on the STEP forum on 1 September 2017, this also includes stamp duty reserve tax, so looks like it includes the purchase of any shares.

The deadline for new trusts is extended to 5 January 2018.

For dormant trusts that have a taxable event, the event needs to be after 26 June 2017.

Agents will need to use a new Agent Services account, which does not appear to be part of the normal Government Gateway.

The register also collects details of the original trust assets but not additions or changes.

The HMRC software cannot handle all circumstances, in which case the online logging needs to be followed up by letter.

Future changes

There remain mismatches between the legislation and what HMRC require.

Penalties for not complying with the rules are separate from the usual tax penalties (eg failure to notify changeability) and part of the regulations, so much wider and severe.

It is possible that after the EU Fifth Anti-Money Laundering Directive (5AML), all trusts will need to register. Although cumbersome, that does make more sense from an AML point of view than just taxpaying trusts.

Actions

Obtain/update details on settlor, trustees and beneficiaries, both for the register or if any entity the trust enters into a business relationship with requests the information.

Worried about an EBT loan?

The Finance Bill 2017 contains provisions enabling HMRC to tax outstanding EBT loans made since 6 April 1999 as if they were disguised pay.

The charge will not apply if the loan* is repaid before 5 April 2019 or has otherwise been fully taxed.

Update: in my view this means the legislation is not retrospective (unless the taxpayer knows it was a “pretend” loan, ie low or untaxed remuneration, rather than a real loan).

Those affected should take advice. That advice should be independent from that given by the scheme promoter or adviser who introduced them into the planning. There is a settlement opportunity available with HMRC and it can be possible to arrange time to pay agreements for the tax.

A bigger problem?

Some will struggle to pay the tax but is there a potentially bigger problem: what if the EBT trustees call in the loan for repayment?

In either case you may also need to take advice from an insolvency practitioner.

Also keep an eye on the leading tax case in this area, relating to Rangers FC https://www.supremecourt.uk/cases/uksc-2016-0073.html

Win or lose*, existing loans that remain unpaid will be taxable one way or another.

*update: the taxpayer lost

QNUPS – for pension or tax purposes?

Having posted a slightly negative view of FICs in the last blog, it is a natural step to also do something similar for another fairly common structure with apparent tax savings, QNUPS.

Tax objective or pension?

QNUPS are Qualifying Non-UK Pension Schemes. The main selling point is the possibility of IHT exemption and a tax deferral of income and gains. These benefits feel vulnerable to HMRC attack or legislative change.

If the desire is wholly or mainly to have a top up pension scheme (in addition to a fully funded normal UK pension), the concept may work. But, the more that tax is the driver, the risk of unexpected tax charges increase.

Legislation

The rules are rather thin, being mainly one paragraph of IHT legislation and a Statutory Instrument. These were introduced to amend a tax anomaly with another type of offshore pension (QROPS). The idea of a QNUPS is to piggy back on another country’s pension rules applying to its residents, subject to certain qualifying criteria.

As complex structures, advisers and offshore companies like them, as they generate relatively high or recurring fees.

What could go wrong?

  • The income and gains of a QNUPS may be taxable on the person funding it, under the UK anti-avoidance rules, although these rules have been relaxed recently, to be more proportionate in line with EU law
  • HMRC may argue that the IHT breaks do not apply
  • The press may see it, rightly or wrongly, as the next tax scam
  • Targeted legislation may be introduced to negate the tax advantages, possibly with retroactive effect
  • QNUPS may be difficult to unwind, if attacked by the tax system, as they are long term pension-like structures
  • The structure might not fully meet the requirements to be a valid pension in the other country (some countries have adapted their rules to make QNUPS attractive to UK residents – but is that enough?)
  • Even if it works, you may face the costs and uncertainty of defending it from HMRC attack

Safeguards

To safeguard against these, you should involve a pensions adviser as well as a tax adviser and I suggest taking a specific opinion from Tax Counsel, based on your own circumstances, to fully explore the risk areas.

A general opinion from Counsel may not be enough – that will be addressed to the those selling the idea to you (check that you also read the instructions to see what was asked). It may not cover downsides or specifics (eg it may say “if entered into as a pension scheme” but that doesn’t mean that you are entering into it as a pension scheme). Ensure that you ask for a review of possible downsides.

Also assume that a tax challenge will take place – does all the evidence genuinely point in the right direction? Who is responsible if ultimately tax is charged? An “audit” of the live paperwork by a tax investigation specialist may be useful to stress test the structure, advice, file notes and email trail in anticipation of a HMRC enquiry.

HMRC consultation

There is an impression that HMRC and the Treasury do not like QNUPS. There was a hint that a consultation would take place, with draft tax changes, but nothing has appeared. It would have to fit within EU law, which may limit what could be done, although a possible Brexit impacts on that, of course.

Overall, tread carefully when considering QNUPS, if the reason is any wider than “I wish to have an additional pension fund”.