Techzone

Trust Registration

HMRC's Trust Registration Service (TRS) was established to meet the UK government's obligations to comply with the fourth and fifth EU Money Laundering Directives (4MLD and 5MLD).

But it also acts as the mechanism by which trustees notify HMRC that the trust has tax to pay. The TRS must be used to obtain a Unique Taxpayer Reference (UTR) for the trust to complete any tax returns. This applies to both new trusts and any existing trusts which have a tax liability for the first time.

Trustees cannot actually file self-assessment returns via the TRS. These must still be done on paper using SA900, unless they are using HMRC approved software.

UK registration

The UK trust register needs to be completed if the trust has UK tax to pay and to satisfy 5MLD which was expanded to include certain trusts which have no UK tax liability.

There will be two separate levels of reporting requirements within the TRS which apply to different classifications of trusts.

The TRS defines these as taxable trusts (those with a UK tax liability) and express trusts (trusts created by written deed). Clearly some trusts will fall in both categories.

Both will need to identify the persons involved with the trust (i.e. settlor, trustees and beneficiaries). However, taxable trusts must also provide additional information on the assets held within the trust at the time of the registration.

Taxable trusts

Trusts which have a UK tax liability already have to register on the TRS. This includes any of the following taxes:

• income tax
• capital gains tax
• inheritance tax
• stamp duty land tax
• land and buildings transaction tax (Scotland)
• land transaction tax (Wales)
• stamp duty reserve tax

Pension schemes set up under trust may have a tax liability, such as stamp duty, but do not need to register with the TRS provided the trustees keep the scheme details up to date on the 'Manage and Register Pension Schemes service'. In this situation, HMRC considers that the pension scheme and trustees have met their TRS obligations.

The TRS must subsequently be updated in each year the trust has a tax liability.  Each time there is a change to the 'beneficial ownership' information, such as changes to trustees or beneficiaries, these must be registered within 90 days of the change.

Express trusts

The 5MLD expanded the reach of the TRS to express trusts even if there is no tax liability.

Express trusts are usually created by a written deed and include the majority of trust plans used for estate and IHT planning, such as gift trusts, loan trusts and discounted gift trusts, which do not normally have any tax charges (income tax, capital gains tax or IHT) year on year. This is because the underlying asset is often an investment bond which allows tax to be deferred until money is actually withdrawn, although there is the possibility of IHT periodic charges every 10 years or exit charges if the trust assigns the bond to a beneficiary.

These trusts were able to register on the TRS from 1 September 2021. Trusts that had a tax charge before this date were already able to register on the TRS.  

Excluded express trusts

There are some exemptions from the need to register as an express trust, but remember they may still have to register as a taxable trust if any UK taxes are due. Amongst those relevant to advisers include:

• Protection policies, where the only benefit is a sum assured paid out on the death of a life assured (or terminal illness). However, these trusts will be required to register if the policy pays out and the proceeds are not paid out within two years from the date of death. Protection policies in trust that have a surrender value can also remain excluded from registration until such time as the policy is surrendered.  If the policy proceeds are retained in the trust the trust will need to register.
• Will trusts are excluded from registration as an express trust for the first two years from the date of death. If the assets have not been paid out by this time, the trustees must register the trust. Trustees may still, however, have to register as a taxable trust if there is any tax to pay.
• Bereaved minors trusts and 18-25 trusts which meet the conditions of s71A and s 71D of IHTA 1984.
• Registered pension schemes which are tightly regulated by FCA or The Pensions Regulator.
• Bank accounts opened by parents or guardians for minor children under age 16, and for children over age 16 who lack mental capacity.
• Statutory trusts which have trust provisions prescribed by law e.g. a trust arising on intestacy.
• Personal injury trusts where a personal injury payment has been paid to a trust, subject to certain conditions.
• Disabled trusts where beneficiary is a disabled person within the meaning given by Finance Act 2005. Additionally, disabled persons must be the only beneficiaries of the trust.
• Historic pilot trusts. Trusts with a value of £100 or less which were already in EXISTENCE before 6 October 2020 are excluded. This will include pilot trusts created for the purpose of accepting death benefits from a pension scheme. There is no exclusion for trusts holding a nominal amount where that trust was created on or after 6 October 2020.

It should be noted there is no specific exemption for bare trusts as they will generally be express trusts. However, Child Trust Funds and Junior ISAs are not considered as trust arrangements by HMRC and therefore do not need to be reported on the TRS.

Irish registration

The Irish Central Register of Beneficial Ownership of Trust (CRBOT) must be completed if a non-Irish trust has a business relationship in Ireland. This will include UK trusts which hold a Dublin based offshore bond.

The CRBOT makes no exception for a trust which has been registered in the UK because the UK is no longer an EU member state. That means dual registration will be necessary.

Existing trusts were meant to register by 24 October 2021. New trusts created after 24 October 2021 had six months to register. The Irish Revenue have acknowledged that there are genuine difficulties in registering by the required dates and will provide support to trustees who are making best efforts to register.

Summary of common trust types

Below is a table which summarise the common trust types which might be encountered and whether they will need to register as either an express or taxable trust on the TRS.

Registration deadline

Non-taxable express trusts

The  deadline for reporting a non-taxable express trust in existence at 6 October 2020 was 1 September 2022.

For trusts created on or after 6 October 2020, the deadline was 1 September 2022, or 90 days after creating the trust if later.

For trusts created after 1 September 2022, registration must be within 90 days.

Any amendments to a trust's details or beneficial ownership must be updated on the register within 90 days.

Taxable trusts

Most taxable trusts created before 6 April 2021 should have already registered with TRS.

For trusts created since 6 April 2021 where the first relevant tax charge was before 4 June 2022, the deadline for registration was 1 September 2022.

Trusts created since 6 April 2021 and have the first relevant tax charge on or after 4 June 2022 will have 90 days to register from the date of the relevant tax charge arising.

Any amendments to a trust's details or beneficial ownership must be updated on the register within 90 days. Trustees of taxable trusts must also confirm that the trust is up to date on an annual basis by 31 January each year, even if there are no changes to the trust.

Penalties

HMRC have confirmed that they will not apply any penalties for a first offence of failing to register or late registration of a trust unless it is shown to be as a result of deliberate behaviour on the part of the trustees.

Deliberate failure to register by the trustees can result in a penalty of £5,000 per offence and will be applied on a case by case basis. Examples of deliberate non-compliance cited by HMRC include;

• Continued failure to register a trust following repeated warnings
• Providing deliberately inaccurate information and continued failure to amend those details.

Trustees have 30 days in which to lodge an appeal should HMRC determine a penalty is warrented.  

Income tax and CGT reporting during lifetime of a trust

Absolute trusts

Trustees

The income and capital gains of an absolute trust belong to, and are taxed, on the beneficiary. So the trustees don't need to complete a tax return or form R185 (Trust Income) when passing income to the beneficiary.

Beneficiary

It is the beneficiary's responsibility to report any income and capital gains of an absolute trust. If the beneficiary is a minor then the parent or guardian would normally complete the tax return on their behalf.

The income retains its source nature (such as dividend, rent or interest) and the beneficiary can use their own tax allowances against income received.

If income tax has been deducted at source, and the beneficiary is able to reclaim tax, this can be done using HMRC repayment form R40.

Income will need to be reported on the parent's own tax return if the parental settlement rules apply.

Interest in possession trusts (IIP)

Trustees

Trustees will not normally need to complete a tax return for trust income if it is all mandated directly to the beneficiaries. If the trustees have paid basic rate tax after deduction of trust expenses they will need to complete a Trust and Estate Tax Return (SA900).

They will also need to provide the beneficiaries with a statement of the trust income paid to them together with tax deducted. This is known as form R185 (Trust Income).

As with Discretionary Trusts the trustees must complete the capital gains supplementary pages (SA 905) where there is a disposal or deemed disposal of chargeable assets. 

From 6 April 2023 this was required where:

• disposal proceeds are more than £50,000 (disposals before 6 April 2023, is £49,200, four times the annual CGT exemption for individuals),or
• the total chargeable gains (before the deduction of any losses) are more than the trust annual exempt amount, or
• they want to claim an allowable loss, or make any other capital gains claim or election for the year.

Where trustees appoint assets out of trust to a beneficiary, this would be a disposal for CGT and may incur a tax liability. There may also be a disposal for CGT where the beneficiary of a contingent trust takes an absolute interest.

Capital gains tax holdover relief may be available for certain transfers in to, or out of an IIP trust. Claims for holdover relief can be made using form HS295. Holdover relief must normally be claimed jointly by the donor and the donee. However, where holdover relief applies on a gift into trust then only the donor needs to claim.

Beneficiaries

Beneficiaries of an IIP trust must report trust income in their self-assessment tax return (SA100). The beneficiaries enter their trust income on the supplementary pages for trusts (SA107). 

Discretionary trusts

Trustees

The trustees of a discretionary trust will normally have to complete a Trust and Estate Tax Return (SA900) when income is received.  This is irrespective of whether they accumulate income within the trust or distribute it to beneficiaries.

Trustees will need to provide beneficiaries with a form R185 (Trust Income) if they distribute income.

As with IIP trusts the trustees must complete the capital gains supplementary pages (SA 905) where there is a disposal or deemed disposal of chargeable assets.

From 6 April 2023 reporting was required where:

• disposal proceeds are more than £50,000 (disposals before 6 April 2023,  is £49,200, four times the annual CGT exemption for individuals), or
• the total chargeable gains (before the deduction of any losses) are more than the trust annual exempt amount, or
• they want to claim an allowable loss, or make any other capital gains claim or election for the year.

Where trustees appoint assets out of trust to a beneficiary, this would be a disposal for CGT and may incur a tax liability. There may also be a disposal for CGT where the beneficiary of a contingent trust takes an absolute interest.

Capital gains tax holdover relief may be available for certain transfers in to, or out of an IIP trust. Claims for holdover relief can be made using form HS295. Holdover relief must normally be claimed jointly by the donor and the donee. However, where holdover relief applies on a gift into trust then only the donor needs to claim.

Beneficiaries

The beneficiaries of a discretionary trust who receive income distributions, must report trust income in their self-assessment tax return (SA100). The beneficiaries enter their trust income on the supplementary pages for trusts (SA107). 

Income paid to a beneficiary will come with a 45% tax credit. The income received loses its source nature and is taxed as trust income. Some or all of the 45% tax credit may be reclaimable by the beneficiary depending on their own marginal rate of tax.

Key dates

Paper tax returns are normally due by 31 October following the relevant tax year end. The deadline is extended to the following 31 January if it is submitted online. HMRC will also need to be advised by 5 October following the end of the relevant tax year when a trust that hasn't been receiving income or making capital gains starts to do so.

Income tax is due to be paid by 31 January following the end of the tax year of assessment.  Where payments on account are due to be made, these are payable also on 31 January then 31 July.

Capital Gains Tax is due to be paid by 31 January following the end of the tax year in which the disposal took place. UK Trustees who disposed of a UK residential property between  6 April 2020 and 26 October had to  report and pay any capital gains tax to HMRC within 30 days of completion of the disposal. For disposals of residential property after 27 October 2021 the reporting timescale has been extended to 60 days. Reporting CGT disposal of residential property will be through an on-line service rather than self-assessment.

Inheritance tax reporting

There's no IHT reporting required for setting up an absolute trust. This is treated as a PET and the trust itself is not part of the relevant property regime for IHT.

Creation of trust (IHT100 & form D34/D39)

Discretionary & interest in possession trusts

Gifts into an interest in possession or discretionary trust are Chargeable Lifetime Transfers (CLTs). There is no CLT on creation of a loan trust and therefore an IHT100 does not need to be completed.

The IHT100 is the collection of forms used to tell HMRC about specific occassions when Inheritance Tax is due on a trust.

An IHT100a form may be required subject to the cumulative value of CLTs in the preceding 7 years. The reporting limits vary depending on the type of asset which is being gifted.

• Gifts of cash and quoted shares/securities must be reported if the cumulative value exceeds the nil rate band.
• Other assets where a valuation may be required (such as investment bonds, land, unquoted shares etc. must be reported if:
  
  
  • the cumulative value of CLT's over a seven year period exceeds 80% of the IHT nil rate band,
  • the transfer would exceed the IHT nil rate band but for any excluding all reliefs and/or exemptions, such as business property relief or the normal expenditure out of income exemption.

Before an IHT100 is completed for the first time it is necessary to apply to HMRC for a unique reference number. This is done by completing form IHT122.

Form D34 is also required where an existing life assurance policy (or form D39 for an offshore bond) is transferred into trust.

Periodic/exit charges - IHT100

Periodic and exit charge events have to be reported on form IHT100, along with IHT100d and IHT100c respectively, if the value of the 'notional transfer' used in the IHT calculation exceeds 80% of the IHT nil rate band.

The 'notional transfer' cannot be reduced by reliefs, such as agricultural or business property relief. For loan trusts the outstanding loan cannot be deducted for reporting purposes. Discounted gift trusts will be valued at the market value which will include the discount at the relevant 10^th anniversary.

An IHT100 will not be required if the 'notional transfer' is below this limit provided the settlor is UK domiciled throughout, the trustees are UK resident throughout and there are no related settlements.

Periodic and exit charges do not apply to absolute (or bare) trusts or qualifying interest in possession trusts (pre 2006 IIP trust, immediate post death interest etc.).

Key date

If an IHT 100 is required, it must be submitted, and the tax paid, within 6 months from the end of the month in which the event occurs.