Offshore Trusts And The Drive Towards Transparency
Most trusts are used for legitimate purposes. Those that are not will find it increasingly difficult to invest and operate in jurisdictions such as the UK, argues the author of this article.
The UK recently unveiled a new beneficial ownership disclosure regime (as reported here). For example, the new Register of Overseas Entities is held by Companies House and requires overseas entities that own land or property in the UK to declare their beneficial owners and/or managing officers. Another development is the Register of Persons With Significant Control (PSC). These raise new compliance challenges that wealth advisors must grasp.
To delve into the details of what’s involved is Marilyn McKeever, partner at law firm BDB Pitmans. We hope these insights are useful and encourage discussion. Feel free to enter the debate and contact firstname.lastname@example.org
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Trusts and transparency
Transparency includes making information available about the true ownership of entities, as well as exchanging information between tax authorities around the world. This is a global initiative aiming to prevent and expose tax evasion, money laundering and terrorist financing.
Trusts are within the scope of the transparency regimes, and rightly so, but they have been squeezed into a framework designed by civil lawyers for companies and similar entities.
Register of Persons With Significant Control
The PSC Register requires UK companies to disclose their “persons with significant control”/“beneficial owners” to Companies House. The register is open to anyone who wants to see it. If the chain of owners ends in a trust, the PSC of the trust, must be identified, which includes anyone who in fact exercises “significant influence or control over the activities of that trust.”
Many settlors, beneficiaries and protectors will be PSCs. The register discloses extensive personal information, including name, date of birth, nationality, address and the nature of the PSC’s “control.” If a PSC shows that they are at serious risk of violence or intimidation, access may be restricted to public authorities e.g. HMRC and the police.
The onus is on the company to find out who its PSCs are, and it and its officers are subject to criminal sanctions and fines if they do not make reasonable efforts to do so.
If a PSC fails to provide their information to the company, or provides inaccurate information, they are also subject to fines and a prison sentence of up to two years and the company can impose restrictions which prevent dealings with the shares, the receipt of dividends and the exercise of voting rights.
Affected trustees will have the tasks of identifying the PSCs, which can be tricky where de facto influence is the test and explaining to the settlor or beneficiaries why their personal details have to be disclosed.
The Trust Register
The Trust Register imposes obligations on the trustees to register the trust with HMRC. The trustees must provide details of who they are, their address and country of residence. Individual trustees must provide additional personal information. They must also provide personal information about the settlor, beneficiaries and protectors.
Initially, offshore trusts only had to be registered if they had a UK tax liability. The regime has been extended to include non-UK express trusts which have or acquire real estate in the UK or which have at least one trustee in the UK and a business relationship with a UK professional. Such trusts should have registered by 1 September 2022. Government figures show that up to the end of June, 7,700 offshore trusts had registered.
As well as law enforcement agencies, anyone with a “legitimate interest” has access. HMRC guidance indicates that this only applies to individuals and organisations investigating money laundering or terrorist financing involving the trust. More worrying for trustees is that anyone can obtain the information on the register about a trust which controls a non-EEA company or other legal entity. So, journalists and members of the public are entitled to see personal details of the settlor and beneficiaries of any registered trust which owns an offshore investment holding company.
HMRC will not provide information about “beneficial owners” who are under 18, lack capacity or would be at risk of blackmail, kidnapping, violence or intimidation. For some families these are very real risks.
A trustee who fails to register a trust or registers late, can be personally liable for a penalty of £5,000 ($5,892) per offence. The penalty cannot be paid out of the trust fund. HMRC has indicated that it will take a “softly softly” approach to a first offence, unless the trustees have defaulted deliberately.
Trustees also have an obligation to update the information on the register if it changes, within 90 days of the change. Failure to do so promptly can again result in £5,000 personal fines.
The Register of Overseas Entities
The final piece of the puzzle (for now) is the Register of Overseas Entities (ROE) which, from 1 August 2022, requires “entities,” principally offshore companies, which own UK land to register with Companies House. The company must provide information about itself and its “beneficial owners.” The rules are similar to those for the PSC. Where trustees are the beneficial owners, their details must be registered as well as personal information for the beneficiaries, settlors and other “interested persons.”
The public has access to the information on the ROE, although trust information is shared only with law enforcement and other public agencies.
A company which fails to register, and its officers, are subject to criminal sanctions including fines up to £2,500 for each day of default and up to five years in jail for the officers. The company must update the information each year and failure to do so is also a criminal offence, as is the provision of false information. In addition, a defaulting company will be unable to register its property interest at the Land Registry or deal with it.
Another headache for trustees is that the information about beneficial owners and the company’s officers must be “verified” by a UK regulated agent before the entity can be registered. This is a stringent process going beyond client due diligence. Many professionals are reluctant to provide the service because the professional will commit a criminal offence themselves if they get it wrong.
Most trusts are used for legitimate purposes. Those that are not will find it increasingly difficult to invest and operate in jurisdictions, like the UK, which take their international obligations seriously.
While that is a good thing, the drive for transparency imposes increasing and extensive compliance burdens on innocent trusts, erodes the ability of trustees to safeguard the privacy of their settlors and beneficiaries and puts the trustees, their underlying companies and their officers at risk of criminal and financial penalties.
Trustees need good, and timely, advice about their obligations.