Increased transparency: Trusts and Overseas Entities

Transparency is becoming the new norm as a means to tackle money laundering and terrorist financing. Governments around the world are seeking increased visibility on assets held in trust and other entities - and the people behind them.

The UK introduced further measures this summer, extending the rules for trusts and introducing a new, separate, Register of Overseas Entities. Here we look at those new measures and what action needs to be taken by anyone affected by them. We also note a recent decision in the EU which seeks to curb increased transparency.

UK Trust Register

The Trust Register opened in 2017, initially just for trusts paying UK tax. It was extended in 2020 to almost all UK trusts and to non-taxable overseas trusts that have UK property or form a UK business relationship. The deadline for registering these new types of trust was 1 September 2022 (or within 90 days going forwards). However, there are some important exclusions. These exempt some non-taxable trusts from registering altogether, and exclude taxable registered trusts from new ‘data sharing’ arrangements that also came into effect on 1 September, including:

Limited public access

The Trust Register is not fully open to public inspection. It is maintained by the UK tax authority, ‘HMRC’, and the registered information is generally only available to them and other law enforcement agencies. However, public access to the beneficial owners’ details (and any potential beneficiary named in a letter of wishes) may now be granted:

1. To people who can demonstrate to HMRC that they have a “legitimate interest” in investigating a specific instance of money laundering or terrorist financing in relation to a particular trust they can identify.
2. To anyone who simply requests the information on a trust they can identify which controls an overseas entity that is not subject to beneficial ownership disclosure in its own jurisdiction.

In either case, information will not be released on trusts which are ‘excluded’, or on overseas trusts unless they have a UK resident trustee (which is unusual).

So although successful access requests will be rare, an action point here is that taxable registered trusts should now consider whether they benefit from one of the exclusions and, if so, update the register to claim an exemption and prevent disclosure in case of a data request.

Information on the register will also be withheld on minor beneficiaries, those who lack capacity, or if there is a disproportionate risk of harm to a person by releasing information. Trustees can update the register if a beneficial owner lacks capacity and can notify HMRC if they believe there is risk of fraud, kidnapping, blackmail or harassment, for example.

Proof of registration

Another change from 1 September is that UK businesses such as banks, lawyers, accountants, investment managers, art dealers and estate agents must seek proof of registration when they form a new business relationship with trustees. Trustees of registered trusts can download a proof of registration document for this purpose. Trustees should also ensure that the business and the Register are kept up-to-date with any changes (within 14 days and 90 days respectively) as businesses are required to report discrepancies to HMRC – including reporting unregistered trusts that need to register.

UK Register of Overseas Entities

On 1 August 2022, the UK launched a new Register of Overseas Entities that own UK land. This Register is open to the public and is maintained by the UK companies’ registrar, ‘Companies House’. It is separate from the Trust Register although there are cross-overs: e.g. some overseas entities acting as trustees may need to register on both – and if a trustee is a beneficial owner of an overseas entity, certain trust information must be provided to Companies House (but this will not be made public).

The Overseas Entities Register is designed to reveal the identity of the beneficial owners of non-UK legal entities that own UK land (not, as it currently stands, the beneficial owners of the land itself, who may be different). The requirement to register now applies before land can be acquired in the name of an overseas entity. It also applies to overseas entities with existing holdings of land, specifically land in England and Wales held in the name of an overseas entity since 1 January 1999 – these entities must register before 1 February 2023.

The consequences of failing to register overseas entities with existing holdings of land are severe. They will be unable to dispose of or deal with their land after the 1 February deadline. More importantly, the entity (and its officers) will commit a criminal offence if they fail to apply for registration by the deadline, and may be liable for daily fines of up to £2,500 (and possibly imprisonment). It will also be an offence if an entity that disposed of land between 28 February 2022 and 1 February 2023 does not provide the necessary information by the 1 February deadline.

More than 31,000 entities need to register by the end of January 2023 but only around 6,000 have done so to date. The registration process can be complex and lengthy. It involves first sending an information notice to any person that an entity knows or believes is a beneficial owner – and allowing them one month to respond. And once the information is gathered, it will need to be independently verified before it is submitted. With only two months to go, overseas entities should make arrangements to register without delay.

As the original legislation was passed at some speed, inevitably it is still evolving. The current Economic Crime and Transparency Bill aims to plug some perceived gaps, specifically to ensure that where there is a trustee in the ownership structure, details of the trust and its beneficial owners are provided in all circumstances. In addition, Companies House will have powers to require further information, for instance if evidence suggests a nominee is recorded as the registrable beneficial owner instead of the actual beneficial owner.

In another very recent development – and a move away from transparency – public access to several EU beneficial ownership registers has recently been suspended. This follows an EU Court of Justice decision that public access constitutes a serious interference with an individual’s fundamental rights to respect for private life and to the protection of personal data. The ruling that parts of the EU anti-money laundering directive are invalid no longer has a direct bearing on UK rules, but it is possible that similar challenges could be made in the UK.