TRS: what is it and how does it work?
The TRS was launched in 2017 by the UK government as an anti-money laundering measure. At that time, only taxable trusts were registrable, but the government then extended the rules and brought many non-taxable trusts with a UK nexus into scope.
This means that trustees holding UK real estate must generally register the trust with HMRC even if they have no UK tax liability.
Which trusts are caught?
The regime applies to all UK express trusts and to non-UK express trusts where the trustees acquire UK property directly, in each case, unless they are specifically excluded. An express trust is one which is intentionally created rather than one which results by operation of law or arises unintentionally. A trust is a UK trust if all of its trustees are UK resident. If there is a mixture of UK resident and non-resident trustees acting at the same time the trust will be a UK trust if the settlor was UK resident and domiciled when the trust was set up or when they added funds to the trust. Otherwise the trust is a non-UK trust.
The regime also applies to non-UK express trusts which:
- receive income from a source in the UK or have assets in the UK on which the trustees are liable to pay one or more of a prescribed list of taxes. This list covers income tax, CGT, IHT, SDLT and its devolved equivalents in Scotland and Wales and stamp duty reserve tax, but not VAT, or
- have at least one trustee resident in the UK and enter into a "business relationship" with a relevant person within the UK. It is rare that trusts will have a mixture of UK and non-UK resident trustees in this way. If the trust is wholly offshore with non-UK resident trustees then the trust is not caught by this limb.
What are the main exclusions?
Some of the key exclusions from registration in the context of real estate are:
- Co-ownership trusts set up to hold property where the property is held as tenants in common provided the trustees and the beneficiaries are the same persons
- Trusts holding tenants' contributions for the purposes of section 42 of the Landlord and Tenant Act 1987
- Trusts created to hold legal title to an asset pending the completion of the legal requirements for its transfer or disposal
- Certain 'financial' or 'commercial' trusts created in the course of professional services or business transactions for holding client money or other assets.
Importantly, however, these can only apply so long as the trust is not taxable. Note that even where an exemption from registration applies, the trustee will generally still be required to keep certain records, so the rules will still need to be considered. Home ownership where the property is held by co-owners but for themselves as joint tenants (without a separate declaration of trust) falls outside of the rules.
Other less common types of express trusts which are set up for particular purposes are also excluded unless they have to be registered because they are liable to pay tax.
Arrangements which involve purely contractual obligations do not give rise to an express trust so fall outside of the scope of the TRS. These include:
- A comingling rent deposit where, after the deposit is paid, the landlord owes the tenant a debt equivalent to the deposit less any deductions for non-performance by the tenant
- Rent deposits paid to landlords as security for the performance of the tenant's lease covenants where the money belongs to the tenant but is charged to the landlord
- On account service charge amounts paid by the tenant to the landlord in advance each year to cover the running of the common parts of a building or estate.
What about unit trusts?
The evolution of HMRC's guidance has contributed to uncertainty as to whether unit trusts, including JPUTs, are required to register on the TRS. For a period from 2018 to 31 January 2023, HMRC's view was that unit trusts (whether authorised or unauthorised) were not required to register on the TRS. This seemingly applied even if they had a UK tax liability, and could have been seen as extending to offshore unit trusts as well as onshore ones. There may therefore be JPUTs that were required to register during this period but didn't do so because they understood HMRC not to require it.
HMRC has now changed its position. HMRC's new guidance confirms that whilst a UK authorised unit trust scheme is not required to register under the TRS unless it has a UK tax liability, there are no special rules for unauthorised unit trusts. By implication, there are therefore no special rules for offshore unit trusts either.
What does this mean for JPUTs and GPUTs?
In our view, JPUT trustees are therefore required to register the trust on the TRS where the Jersey trustees:
- acquire UK land directly on or after 6 October 2020 (unless, exceptionally, one of the exemptions we explain above applies); or
- have UK income or assets on which they are liable to pay a relevant tax (in a period since the rules were first introduced in 2017). In the case of JPUTs, SDLT or its devolved equivalents in Scotland and Wales are the taxes most likely to be relevant.
There will be significant overlap between the two bullets above. However, indirect acquisitions of UK land where the trustees are not the registered owner of the land may cause the JPUT to fall within the second bullet but not the first. And it is possible that some low-value acquisitions or transactions which qualify for an exemption or relief from SDLT will fall within the first bullet but not the second.
A JPUT which acquired UK land prior to 6 October 2020 and has not incurred a liability to pay a relevant UK tax in a period covered by the TRS regulations is not required to register under the TRS.
The same analysis will apply to GPUTs.
What are the key dates?
Going forwards, new registrable trusts have a 90 day window in which to register and provide the required information to HMRC. This runs from the date the trust acquires UK land for offshore non-taxable trusts and from the date the trustees become liable to pay a relevant tax for taxable trusts. UK non-taxable trusts must register within 90 days of being set up.
The time periods varied for registration for express trusts created prior to 4 June 2022, depending on whether, and when, the trustees had a UK tax liability. But in each case, the deadlines have now passed if the trust had a UK tax liability in a period covered by the TRS regulations or acquired UK land on or after 6 October 2020. However, HMRC is taking a "light touch" approach to accidental non-compliance at this stage and we would recommend all trustees of trusts to check whether they have any trusts with any UK nexus which still need to register and, if so, do so as soon as possible.
What are the main triggers for registration?
In summary, in broad terms, there are three main triggers:
- A non-UK express trust which receives UK source income or has UK assets where the trustee itself is subject to a UK tax liability of the type listed above (if the beneficiary is subject to a tax charge then this does not trigger a TRS registration requirement); or
- A non-UK express trust where the trustee directly acquires a registerable interest in UK land on or after 6 October 2020.
Is the register public?
Unlike the Land Registry and elements of the Companies House database, the trust register is not public. Law enforcement agencies can obtain the information on the register about a trust and its beneficial owners. There are two circumstances in which others can request information from the register. These are: legitimate interest requests in order to facilitate money laundering investigations; and third country entity requests where information is sought about who holds a controlling interest in a non-UK company or other legal entity.
Will nominee companies owning UK land be caught?
Yes, nominees will be caught where they own UK property directly under an express trust (unless an exemption applies).
What are the penalties for non-registration?
There are penalties for failing to comply including fines for late filing and there can be criminal sanctions in some cases. It is believed that HMRC will be lenient on penalties initially, especially in relation to JPUTs and GPUTs given the recent change in guidance, but this should not be relied on.
What information has to be registered?
The trustees have to give basic information about the trust including details regarding its beneficial owners. Where the trustee (or any other person having control over the trust) or the beneficiaries are legal entities, this may require the beneficial owners of those entities to be identified. More information is required for taxable trusts than for non-taxable ones.
Practical implications/how to register
Professional trustees will already be fully cognisant of the TRS. However, the rules also apply to other persons who act as trustee of an express trust, even where this is not their day-to-day business.
Registration is through the Government Gateway portal and is relatively straightforward once the necessary information has been gathered.
Next steps
Given the recent change to HMRC's guidance in relation to unit trusts, trustees of unit trusts and their advisers need now to check whether they have any trusts which still need to register.
Authored by Adam Parry and Ingrid Stables.
