EU's 5th Money Laundering Directive

The EU's 5h Money Laundering Directive and how this affects you

Over recent years the leaders of the major Western nations have made efforts to frustrate the flow of money representing the proceeds of crime, such as drug smuggling or fraud, or which might be used to fund terrorist activities. Often criminals or terrorists seek to “launder” the suspect funds through financial transactions which result in the true ownership of the money being obscured so that it appears to come from an impeccable source.  The EU has drawn up a number of Anti-Money Laundering Directives to which the UK were party.  The UK has agreed to adhere to the underlying principles of these, even after Brexit.

One aspect of seeking to clamp down on dirty money is greater transparency generally. Many readers will be familiar with the need to produce ID documents and proof of address before embarking on a financial transaction.  The rationale is that the main participants in the transaction have been identified and found to be genuine actors in the arrangement. 

The requirement for transparency is now extended to the underlying ownership or control of companies and trusts.   The EU’s 5th Anti-Money Laundering Directive has led to the obligation to register almost all UK trusts with the Trust Registration Service by 1 September this year.

“But how would this affect me”, you may wonder. “Why would I be worrying about trusts?” Well, many people have trusts but do not realise that they do. In particular, prior to a change in the law around 2007/2008, many married couples used to set up Nil Rate Band trusts in their wills in order to make full use of their Inheritance Tax (IHT) allowances.

Everybody had (and still has) a Nil Rate Band tax-free allowance - £300,000 at the time (now £325,000). But gifts to spouses were free of IHT, so if you left your estate to your other half, you would potentially be doubling the size of their estate, but without increasing their IHT allowances, often substantially increasing the IHT that would be payable.

With the introduction of the Transferable Nil Rate Band in October 2007, people who don’t use their IHT allowance (e.g. because they gift everything to their surviving spouse) can now pass it to their spouse, who can then benefit from up to two full Nil Rate Band allowances (£650,000 at present) when the time comes for their estate to be administered.

Before then, however, in order not to waste NRBs, the standard ploy was a Nil Rate Band Trust. This worked by gifting the value of the NRB (e.g. £300,000) to a trust instead of to the surviving spouse. This used the NRB for the first person to die.  In fact, the spouse could often benefit from the trust, but this was not automatic.  This meant that the spouse could say the money didn’t belong to them and did not therefore have to be declared as part of their taxable property on their death.

The problem is that although many wills contained these provisions people, who perhaps didn’t take professional advice following the first death of a couple, didn’t always realise that they did have such a trust. They often assumed that everything just passed to the surviving spouse and that if they didn’t take steps to “set up” the trust, it wouldn’t exist. If all the family were happy for everything to pass to the surviving spouse, did it matter if there were complicated trust provisions in the will that people didn’t really understand fully?

The trouble was (and is) that active steps weren’t needed to “set up” the trust. The trust was set up automatically by virtue of the death of the first spouse. What was often needed at that time were pro-active steps immediately to close down the trust. If no such steps were taken, the trust would still be in existence. Often such trusts lay dormant for years or decades – but the issue would then come to a head on the second death when the estate needed to be declared to the taxman. It might have also cropped up when the former matrimonial home had to be sold, for example to provide funds for care fees.

But now the issue comes to a head sooner because such trusts are legally required to be registered.  This is the case whether or not the trust property is currently generating any income or gains and has no IHT consequences. 

The registration clock is ticking and it is time to check the records to see if you are involved in a trust and then ask for some professional guidance.  We at Pearson Hards are able to advise on all aspects of these types of trusts and can assist in the registration process.  Please call us today on 0208 949 9500 and ask to speak with Paul Denza, who will be able to help you.