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Who do you trust?
In simple terms, a trust is an arrangement where people (trustees) are trusted to look after property for beneficiaries who cannot be trusted with the trust property – e.g. because they are too young or vulnerable or because the trust property is intended to be used by a number of people in succession, perhaps passing from one generation to the next.
There are many different ways of categorising trusts – for example in terms of their tax treatment (e.g. life interest or relevant property trust); their beneficiaries (e.g. bereaved minors or vulnerable beneficiaries); but also, importantly now, in terms of how they were set up (e.g. express trusts or implied trusts).
An ‘Express Trust’ is one deliberately set up by a settlor (whether in their lifetime or via a Will) – to be distinguished from one which comes into effect e.g. by operation of law.
There is a perception that many, if not most trusts are set up to save tax and there are certainly tax efficient ways of arranging and running trusts, which can often save many thousands of pounds in tax However, the reality is that the primary motivation for a trust is usually to protect assets until they can be passed to the ultimate beneficiary. In fact, it would often save money overall to pass money straight to the final recipients, if that were possible, rather than sink funds into trust.
Before the tax law changed, it was a common arrangement for a married couple to use their home to set up “nil rate band" trusts to ensure that maximum advantage was taken from the tax allowances available. Often the couple would hold their property as tenants in common, so on the death of the first person their share would pass into a trust. The trust would allow the surviving spouse to live in the property for their lifetime, but on their death the share would pass according to the first person’s will. In practical terms very little, if anything, was needed to maintain these trusts and their existence was often forgotten.
There is also a perception in international governmental circles that trusts can be used for money-laundering – although there is little evidence that that has in fact happened on any significant scale, at least with UK onshore trusts. Nevertheless, the ever-tightening anti-money laundering belt (we’re now onto the fifth EU money laundering directive “MLD”) has trusts firmly in its sights. The latest transparency drive has increased the imperative to formally register trusts with the authorities. Supposedly, the register is for crime prevention purposes and will not be open to public inspection; however we would not necessarily be surprised by a movement of the goalposts over time. Previously, UK trusts only needed to be registered if there were immediate tax consequences. Now, almost all express trusts will need to be registered, even if they are to all intents and purposes dormant. This includes trust arrangements like the nil rate band trust mentioned above.
The clock is already ticking! The new rules apply to all trusts that have been in existence after 6th October 2020, when the fifth MLD was implemented into UK law. It is already possible to register them with the Trust Registration Service, set up under the fourth MLD, which was implemented in June 2017 but it is not yet mandatory. The good news is that the original obligation to register by March 2022 has been deferred by HMRC until September 1st, 2022. For any Trusts settled after 3rd June 2022, trustees will have 90 days to register.
Nevertheless, now is the time to dig out and dust off those old wills and trust documents to check if you may need to register your trust. These things can be dealt with directly by Trustees online, but if you require any assistance in ascertaining, understanding or carrying out your obligations, please do not hesitate to contact Pearson Hards on 020 8949 9500 who can provide guidance and assistance with this complex area of law.