Trusts are often associated with the super-rich, the passing of hereditary wealth and the disguising of assets in mysterious offshore locations. However, they are also used by many people for rather more mundane reasons as a sensible way of arranging their financial affairs.
Examples might include trusts which:
- Have received the death benefit from a pension fund;
- Have received death benefits from life assurance policies but have not paid the proceeds to beneficiaries;
- Were set up to receive part or all of a deceased’s estate.
Two new pieces of legislation, one already in force and one to follow in January 2018 might have an impact on the responsibilities of the trustees.
The first of these new responsibilities derives from the EU's Fourth Anti-Money Laundering Directive (4MLD), implemented to improve the transparency of corporates and trusts, and requires member states to keep a register of these entities.
All trusts with a UK tax consequence (income tax, capital gains tax, inheritance tax, stamp duty land tax or stamp duty reserve tax) will need to be registered with the HMRC’s Trust Registration Service that will include those trusts that have already registered with HMRC. Any new trusts with a UK tax consequence will be required to use the registration service to obtain a unique taxpayer reference. The information required by the HMRC is substantial and failure to register could result in a custodial sentence. Urgent action may now be required if you have not already considered your registration obligations.
Where the sole asset of a trust is an investment bond, the trustees may never have previously had a UK tax consequence. This type of investment structure is popular with trustees as it is non-income producing and therefore does not require the trustees to report income or capital gains within the bond to HMRC. It is also flexible enough that any tax paid on the eventual surrender of the investment bond is often borne by the beneficiary of the trust, rather than the trust itself.
However, where an asset is held in a discretionary trust there might be an inheritance tax charge after 10 years, called the “periodic charge”, and therefore triggers a requirement to register. Periodic inheritance tax charges may apply if the value of the trust is greater than the inheritance tax nil rate band at each 10 year anniversary, currently £325,000. The rate of tax is approximately 6% of the excess over the nil rate band.
Care needs to be exercised where the trust had received death benefits from a pension scheme as the 10 year anniversary is unlikely to occur 10 years from the date of death. Instead the 10-year anniversary will arise on the anniversary of the date the member joined the pension scheme. An example may help; John establishes a new pension scheme in June 1995. He died in October 2009 and the fund is left to a trust. The trustees expect the first period charge to occur in October 2019, 10 years from John’s death. However the first 10 year anniversary actually occurred in June 2015.
Periodic charges, particularly where there are connected pension schemes, are a very complex area and specialist advice should be sought.
The second issue facing some trustees is the Markets in Financial Instruments Directive II (MIFID II), a piece of EU financial services legislation which is causing significant challenges to the industry. One area of particular concern relating to trustees is the need to potentially obtain and maintain a Legal Entity Identifier (LEI). This will be required by trustees who invest and trade in listed vehicles e.g. stocks and shares, ETFs and investment trusts. From the 3rd January 2018, trustees who have not obtained an LEI will be unable to trade in these instruments. The LEI can be obtained from the London Stock Exchange for £115 plus VAT, with an annual renewal cost of £70 plus VAT.
Tom Lloyd Read, Chartered Financial Planner
Head of Advice
Commentary first appeared in:
What Investment - A matter of trust (in print on 1st November 2017)
Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.
Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155) and is a company registered in England, number 08284862