TRS: position re property where two legal owners but only one beneficial owner

Trusts Discussion
1

Dear Forum,

I would be grateful for any thoughts on the following:

The HMRC manual notes:

‘Trusts of jointly held property (‘co-ownership trusts’) where the trustees and beneficiaries are the same persons are excluded from registration.’ (from: TRSM23050 - Types of trust that need to be registered: contents: excluded express trusts: contents: property ownership - HMRC internal manual - GOV.UK)

Gov.uk notes that the following trusts ‘do not need to register’:

‘co-ownership trusts set up to hold shares of property or other assets which are jointly owned by 2 or more people for themselves as ‘tenants in common’’ (from: Trust Registration extension – an overview - GOV.UK)

If a property has two legal owners (X and Y) but Y is the sole beneficial owner, does the trust need to be registered on TRS?

Thank you for your time!

Very best wishes

Owen

2

Yes, because the legal and beneficial owners are not the same. I don’t see how you can apply the exemption to a subset.

3

Dear Andrew

Thank you for your response on this. I appreciate your clarity.

Thanks again,

image002.jpg

4

I agree with Andrew.

It seems very clear that on a literal interpretation registration is necessary
ie the trustees and beneficiaries are not identical.

Presumably, the beneficiary with 100% of the beneficial interest (Y) can call for the other trustee (X) to transfer their legal interest to Y resulting in a sole trustee (Y). The trust would then fall away ie there would be no co-ownership trust.

Malcolm Finney

5

Dear Malcolm,

Thank you for your comments. I appreciate your time with this.

image002.jpg

6

It is important to note that if A and B hold property for themselves as tenants in common, the trust has to be registered if it is taxable. Schedule 3A does not apply to regulation 45. Although any income and gains would not result in a tax liability for the trustees in that capacity, SDLT on the grant of a lease, for example, is payable by the trustees as such.

Ray Magill

7

Correction: I said that Schedule 3A doesn’t apply to regulation 45. It does, with effect from 6 October 2020.

Thus, if SDLT was payable on the grant of a lease before that date to A & B (on or after 26 June 2017, I assume), the trust should have been registered. I suspect there are hundreds, if not thousands affected.

Ray Magill

8

Schedule 3A does not apply in relation to all taxable trusts within Reg 45. Only to certain non-UK trusts

Jack Harper.

9

That is not my reading of SI.2020/991, which inserts -

With effect from 6 October 2020
Section 45((10A) The trustees of a taxable relevant trust which is a UK trust, and is not an EEA registered trust or a trust listed in Schedule 3A, must provide the Commissioners with the information specified in paragraph (10E), apart from any information already provided to the Commissioners under regulation 45ZA (at a time when the trust was not a taxable relevant trust)

Ray Magill

10

Can anybody explain the odd overlap between 45(2) and 45(10A/B/C/D/E)?

Just for example, it looks to me like a UK taxable trust which qualifies as excluded under Sch 3A does not have to provide the country of residence of beneficial owners under 45(10A) but it still has to provide their usual residential address (including country!) under 45(2) and 45(6).

Am I missing some deeper logic or is it just terrible drafting?

11

Ray Magill is right and I am wrong. I can only echo Andrew Goodman.

Jack Harper

12

I’m trying to follow Ray and Jack’s exchange above.

It seems to me that Reg 45 deals with three categories of taxable relevant trust [reg 45(10A), (10B) and (10C)].

One such category, [10A], is that of a taxable relevant trust which is a UK trust [reg 42(|2)(c)] with a UK tax liability which, inter alia, is not a trust falling within
Sch 3A [ie a trust which qualifies for exemption].

A UK tax liability is thus one requirement if 10A is to apply [reg 45(14)].

A UK trust falling within Sch 3A may or may not have a UK tax liability. If it does have UK tax liability and falls within Sch 3A then 10A is inapplicable. However, if the trust has a tax liability but does not fall within Sch 3A then 10A applies.

10B and 10C relate to non-UK trusts with the Sch 3 above condition being relevant to both 10B and 10C.

Reg 45ZA deals only with trusts which are not taxable relevant trusts. If the trust is not a taxable relevant trust then reg 45 (10A), (10B) and 10(C) is irrelevant. Hence in principle regs 45 and 45ZA are mutually exclusive.

Malcolm Finney

13

I agree with Malolm’s analysis and observe only that the information requirements of the non-taxable trusts register are to be found in Reg 45 and not in Reg 45ZA. I would have thought that the Reg 45 (10) contents should have been in Reg 42.

Jack Harper

14

Thank you Jack for your response. Greatly appreciated.

May I just ask wrt you comment “… and observe only that the information requirements of the non-taxable trusts register are to be found in Reg 45 and not in Reg 45ZA”.

Are you referring to reg 45(10)(c) [which relates to non-taxable relevant" trusts] ?

Malcolm Finney

15

Yes. It seems to me that, given the opportunity provided by the need for the 2020 Regs, the drafting would have been better if all the register information provisions were in Reg 42 or even if the entirety of Part V had been recast to make it more user-friendly. This would still have constituted a re-arrangement of the deck chairs on the Titanic, in the absence of addressing the most blatant substantive idiocies addressed in this Forum. The belated addition of non-taxable trusts in 2020 could have prompted a more logical layout of this part of SI, as it might have been if they had been originally included in 2017. The incremental administrative effort in this regard would have been minimal: the entire approach is redolent of a disdain for the end-user which is really a throwback to the bad old earlier days of myopic drafting of primary and secondary legislation.

Jack Harper

16

Thanks again Jack.

I agree with your comments and as you suggest it would have made more sense to recast Part V. I have found it very difficult to follow and untangle the cross referrals following the introduction of non-taxable trusts and, as is clear from this forum, I don’t think I’m the only one.

I wonder how the smaller professional firms (who have limited resources) are coping with the whole TRS stuff and how many trustees may end up with perhaps not insignificant penalties.

Malcolm Finney

17

I find it easier to understand the inter-relationship of regulations 45 and 45ZA SI.2017/692 by an example. The following example assumes the ‘year’ in regulation 45(14) is the calendar year, and not the tax year, but the dates adopted in the example make that an unnecessary distinction.

Suppose a UK relevant trust (not within Schedule 3A) has a tax liability, perhaps SDLT, in August 2017, but no tax liabilities thereafter until the trust incurs another SDLT liability, on 9 September 2022.

Consequently, information was required under regulation 45(5)(6) & (7) following the 2017 tax liability.

Information was required under reg.45ZA(3) & (4) by 1 September as a non-taxable trust.

Information as a taxable trust, save any already provided under regulation 45ZA should be provided by 30 November 2022, as specified in reg.45(5)(6)(7) & (10E).

Notably, the information to be provided for a trust which has never had a tax liability (since the introduction of the regulations, 26 June 2017) does not include that shown in regulation 45(5)(6)(b)(c)(d),(7)(b)(d)(e).

Thus the trustees need not even tell HMRC the trust’s name!

As Jack says, it would be simpler if Part V were recast, or at least regulations 45 and 45ZA.

Ray Magill

18

Ray’s example serves to emphasise the lack of guidance for practitioners but especially for lay trustees. The TRSM is piecemeal and patchy at best. What was needed was a decent plain English guide with examples.

Two other matters come to mind as unresolved:

1 How does TRS interact with s7 TMA 1970? It has not been repealed or amended. If a trust was “first liable” to any of the paragraph(14) taxes in any “tax year” (not defined) the trustees have until 31 January following its end to provide the required information. Their obligation under s7 is unaffected and requires a notice by the following October 5. Not only that, the s7 obligation is plainly not satisfied by a TRS registration made before that date. Although the trust is registering as a relevant taxable trust (and the online procedure at least asks for which of income tax and CGT it is liable to) nowhere does HMRC say that this fulfils the s7 obligation. Of course early registration may prompt the despatch and receipt of a s8A return. The s7 notification may apparently be in such form as HMRC may prescribe (“any other document” in s113(3) TMA) but is that authority for them to prescribe TRS registration as such? They have had since 26 June 2017, if not earlier, to clarify this.

2 HMRC happens to be in charge of the TRS register and also the UK’s tax authority. Its role as the latter is restricted to taxes; s1 TMA, s5 CRACA 2005, s215 IHTA, s42 FA 2003. What authority does HMRC have in that capacity to seek registration of any estate (s7 with s74 TMA) via TRS in its other capacity? My letter to Trusts of 3 August 2022 on this point remains unanswered. Unless Gina Miller or the Good Law Project takes an interest we may never know. Might is right at Somerset House, though not for the Prime Minister, said Lady Hale et al. A refusal by PRs of a complex estate to register on TRS but who notify under s7 on time surely cannot be exposed to a TRS or TMA penalty.

Jack Harper

19

It is clear that obligations under s.7 TMA 1970 are not fulfilled by a trust registering with the TRS. The timetable is very different.

Under s.7 TMA 1970, trustees who have not been required to complete a return, and who first have a tax liability in respect of income or gains in a particular tax year are required to notify ‘an officer of the Board’ by the 5 October next following that year.

The date by which a trust must provide information as a consequence of having a tax liability is very different under the TRS regulations.

If the trust was set up before 6 April 2021, the trustees have until 31 January next following the first tax year that are liable to pay any of the seven taxes to register as a taxable trust with the TRS.

But for trusts set up on or after 6 April 2021, and the second and subsequent tax years for trusts set up before 6 April 2021, the timetable can be much tighter.

If a trust set up on or after 6 April 2021 was liable for any of the seven taxes named in regulation 45(14) in 2021/22 or in 2022/23 before 4 June 2022, it had to register as a taxable trust with the TRS and provide the prescribed information by 1 September 2022.

Otherwise, a trust has to register as a taxable trust with the TRS and provide the prescribed information within 90 days of the trustees becoming liable to pay any of the taxes.

This last rule is easy to recognise if the tax is SDLT, less so if it is income tax or capital gains tax, where trustees cannot know if there is a liability until after the end of a tax year.

For example, if a trust set up in May 2021 incurs a capital gains tax liability on disposal of residential property on 7 July 2022 (its first taxable event), it must pay that tax by 5 September; but the TRS reporting date is 5 October, even if a subsequent disposal in tax year 2022/23 results in there being no tax liability for that tax year.

So it is clear that trustees must still have regard to S.7 TMA 1970.

Ray Magill

20

It seems that sending in an unprompted return before 5 October will discharge the s7 obligation: s12D TMA 1970

Jack Harper