Many people are Trustees or beneficiaries of Family Trusts. Trusts can be created in a person’s lifetime, or by their Will, when someone gives assets to someone else (“Trustee”) to hold for the benefit of one or more people (the “beneficiaries”).
Before the introduction of the inheritance tax transferable nil rate band in 2007, many people had discretionary Trusts in their Wills as a means of mitigating inheritance tax. Some of these Trusts have professional Trustees: typically, a solicitor alongside a family member. However, some people appointed friends and family as Trustees, believing the role to be simple and trying to save on costs. I have seen numerous cases where the first spouse has died, and no formal legal advice or action was taken at that time. Often Probate is not needed when the first spouse dies, and so no action is taken with regard to the Trust. If no action is taken within 2 years, the Trust is deemed to have been established and may well need reporting to HMRC on the 10-year anniversary.
Trustees are often completely unaware of the reporting obligations they face.
Most Trusts created after March 2006 are potentially liable to inheritance tax charges on each 10-year anniversary after the Trust was created. HMRC figures from May 2018 showed that an estimated 75% of Trusts had not completed a 10-year return.
Even if there is no inheritance tax to pay, the Trustees must submit a full account to HMRC on each 10-year anniversary (where the value of the Trust is over 80% of the nil rate band). Interest and penalties may be charged for late payment and filing, and these penalties may be payable by the Trustees personally.
It is the Trustees’ responsibility to calculate if a charge applies and whether the Trust needs reporting.
It is not just the 10-year anniversary that needs reporting, however. The Government consulted on the taxation of Trusts in November 2018 and the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness (snappy title guys!) published a report in January 2020 recommending that inheritance tax is abolished and replaced entirely with a new regime, and this would significantly impact on Trusts. There has been much talk of simplification, but if anything, the tax and compliance burden on Trusts has vastly increased in recent years.
There is a global move towards greater transparency about ownership of assets, disclosure regimes and public registers of assets. If you have opened a bank account or investment recently you will have come across the Foreign Accounts Tax Compliance Act (FATCA), the Common Reporting Standard (CRS), and you may have been asked for your Legal Entity Identifier (LEI). HMRC launched the Trust Registration Service in June 2018 and from that time all Trusts must have registered online with HMRC if they have any tax liability (such as income tax, capital gains tax, inheritance tax or stamp duty land tax).
Most recently, the 5th Money Laundering Directive (5MLD) was introduced and this goes further than previous regulations by stating that Trustees must register all Trusts online with HMRC regardless of whether any income tax, capital gains tax, stamp duty land tax or inheritance tax is due. Trustees are also obliged to complete a register of beneficial owners and provide information about the place of birth of beneficiaries and their tax residency. Watch this space for further updates on how HMRC are implementing this.
So, what next? If you are a Trustee of a family Trust, contact us 01423 543102. We can :-
- Review the terms of the Trust to see if the Trust is still necessary;
- Check to see if the Trustees are still the right people to deal with matters;
- Advise whether the Trust needs reporting to HMRC for its 10-year anniversary, and deal with the return on your behalf if you wish;
- Advise whether the Trust needs registering with HMRC and deal with this on your behalf if you wish.
Being a Trustee is an honour, but it is not to a role to be taken lightly. There is an ever-increasing tax and compliance burden on Trustees and trying to save money on professional fees might end up costing far more than you realise in penalties, interest and stress. Not to mention missed tax planning opportunities that could see some of the professional fees offset by the tax saved!