The complexities of trust compliance in the UK

The UK's trust compliance regime has become increasingly complex. While the regulatory intention behind enhanced transparency is clear, many trustees continue to misunderstand their obligations or (unintentionally) fail to comply altogether. For even the most well-meaning trustee, the risk of falling foul of the rules has never been greater.

This article looks at three key compliance regimes for trusts: the Trust Registration Service (TRS), the Automatic Exchange of Information (AEOI) framework, and in Scotland, the Register of Persons Holding a Controlled Interest in Land (RCI). Each comes with different objectives, requirements, and enforcement risks - but they share one crucial feature: failure to comply can have costly consequences.

1. TRS: not just about tax

The TRS, introduced in 2017 and significantly expanded in 2020 to align with European rules, is not a tax register per se, but a centralised register designed to capture information about the beneficial ownership of trusts.

All UK express trusts, unless explicitly excluded, must be registered on the TRS (even if they have no UK tax liabilities). Certain non-UK trusts may also be required to be registered on the TRS.

Unfortunately, there is often confusion on various aspects of the TRS:

• The objective of the TRS- While the TRS’ beginnings may be said to have been in tracking trusts with UK tax liabilities, the TRS is now most concerned with clarifying who (1) has control over trusts, and (2) stands to benefit from them.
  
• Who owes obligations under the TRS? - It is the responsibility of those in control of the trust i.e., the trustees themselves or their agent acting on their behalf, who need to create and maintain a trust’s listing on the TRS. In any event, registration of a trust with the TRS will involve some trustee involvement in the initial stages.
  
• The relevance of a trust being ‘taxable’ or not - Whether a trust is taxable or not will have a direct bearing on the nature of the trustees’ reporting obligations i.e., whether annual TRS filings need to be completed or not. Note that the obligations owed by trustees of taxable and non-taxable trusts are similar but there are some differences to be mindful of. Moreover, it is possible for a trust to transition from being ‘taxable’ to ‘non-taxable’, meaning that the reporting obligations may change too.
  
• How the TRS interacts with other aspects of trust compliance- Trustees need to navigate different, often overlapping, compliance regimes (some of which are mentioned below). The fact that another compliance regime is engaged may have consequences for TRS reporting that trustees need to be mindful of.

2. Automatic Exchange of Information (AEOI): technical traps for trustees

AEOI refers to the agreements in place between the UK and foreign tax authorities, to exchange information on financial accounts held by account holders in the UK, who have non-UK connections. Where Trustees owe reporting obligations under AEOI, they must carry out due diligence and reporting to HMRC in line with the Common Reporting Standard (CRS) and/or the Foreign Account Tax Compliance Act (FATCA).

The AEOI regime is complex and can, in practice, be difficult to understand and navigate. Common areas of confusion include:

• Misclassification of the trust for AEOI purposes. Determining whether a trust owes reporting obligations requires some analysis and a clear understanding of how the trust operates. A misunderstanding can result in trustees failing to meet their obligations, which may result in financial penalties. 
  
  Trustees must monitor the trust’s activities on an annual basis, as a change of activity or circumstance could alter the trust’s AEOI classification and/or the information reported each year.

• Reportable accounts will differ depending on the CRS and FATCA regimes. Whilst some trusts are exempt from AEOI reporting under FATCA, they may be reportable under CRS. Moreover, they do not attach importance to the same criteria e.g. a person may be reportable due to their place of tax residency alone under CRS rules, whilst US citizenship and US residence are both material factors under FATCA.
  
• Missing reporting deadlines or omitting information: Trustees that are required to complete AEOI reporting must do so to HMRC by 31 May each year. Mistakes such as omitting controlling persons, misunderstanding what constitutes a financial account or (more generally) when an AEOI report is required can lead to enforcement action.

3. Register of persons holding a controlled interest in land (RCI) – a Scottish specific

Unique to Scotland, the RCI seeks to identify who controls land and property. The relevance to trusts stems from the fact that, depending on the kind of trust that holds the legal title (via the trustees) to the property, trustee decision making regarding the land / property may be subject to the influence of another party.

There are a few aspects of the RCI rules that can lead to mistakes being made by the uninitiated:

• Not understanding the trust structure. The kind of trust will have a direct impact on the extent to which the trustees are subject to direction from another party e.g., a settlor, a liferenter or otherwise.
  
• Incomplete or incorrect filings. As with the TRS, keeping RCI information accurate and current is essential. It is perfectly possible for a trust property which was not previously subject to the RCI to become so.
  
• Failing to understand the gravity of non-compliance. Unlike other compliance regimes, a failure by trustees to adhere to their obligations under the RCI is a criminal offence in Scotland which carries a significant financial penalty.

Be clear, not complacent, with obligations

The UK’s trust compliance regime now, arguably, matches that of UK registered companies in terms of its complexity. Trustees must understand the obligations that they owe under each of the distinct sets of rules and be supported by suitably qualified practitioners that are able to guide them through the practical application of these rules in the day-to-day administration of their trust.

Brodies has extensive experience of advising on the use of trusts, including on the compliance obligations owed by trustees and how to manage them. If you need help in managing a trust or have questions on the different regimes that apply to trusts, please get in touch with one of our trust experts.