Trustees of trusts established in corporate transactions should be aware of new recordkeeping requirements imposed by the Money Laundering, Terrorist Financing and Transfer of Funds (Payor Information) Regulations 2017, as amended must pay and comply with (“AML Regs”). AML Regs introduces new legal registration requirements in the UK for tax-exempt express trusts arising on corporate transactions. The new legal obligation must be met by the trustee of the trust, who is most likely the seller of the company’s shares or assets.
In 2017, HMRC launched an online trust registration service (“TRS”), a digital platform designed to enable trustees to comply with their registration obligations. The purpose of the TRS is to reduce the risk of money laundering and make it more difficult for people to use trusts as a vehicle for financial crime. Therefore, the failure of a trustee to fulfill its registration obligations relating to its trust and its beneficial owners is a crime and is punishable by fines and/or imprisonment.
Trust in corporate transactions
Trust deeds arise during many business transactions and are used in a variety of ways to hold amounts, assets, or documents belonging to persons other than the trustee. For example, explicit trust is a common occurrence.
Sale of shares when:
- Shares held by seller pending registration of transfer to buyer
- The total consideration will be held in an escrow account or held by the purchaser until the end of the agreed warranty claim period.
Business sales when:
- Seller retains interest in contract for Buyer while third party consent is pending
- The “wrong pocket” clause transfers ownership of assets held by one party and belonging to another party
TRS exclusion
Trusts created in corporate transactions are unlikely to require TRS registration as there is a comprehensive list of exemptions that apply to Schedule 3A of the AML Regs. The exclusion most likely to apply to trusts arising in corporate transactions is the “commercial transaction” exclusion. It “covers trusts created for the purpose of enabling or facilitating transactions conducted for genuine commercial reasons, or to protect or enforce rights … for any purpose”. If the transaction involves an escrow agent, it is not necessary to register the trust as there are certain exclusions for trusts over property held in escrow.
The extent of the exclusion means that the majority of trusts in business transactions (including those listed above) are tax-exempt and therefore likely to be classified as “excluded trusts” if they cannot be registered with the TRS. .
Ultimately, it is the recordkeeping requirements, not the reporting requirements, that impose the more burdensome duties on trustees that arise during corporate transactions.
Trustee Record Keeping Requirements
Important for trustees of express trusts used in corporate transactions are recordkeeping requirements that require them to maintain accurate and up-to-date written records of all trusts and their beneficiaries. It should be noted that maintaining these records is a fiduciary duty only and failure to do so is a crime punishable by fines and/or imprisonment. Information held in TRS is not public, but records must be provided if requested by law enforcement. For more information, HMRC has produced a guide outlining the details that should be recorded.
