Trustees of trusts created in corporate transactions must pay attention to and comply with the new record-keeping requirements imposed on them by the Money Laundering, Terrorist Financing and Transfer of Funds Regulations (Payer Information) 2017 (as amended) (“anti-money laundering rules”). The AML regulations introduce new legal registration obligations in the UK that apply to non-taxable express trusts arising from corporate transactions. The new legal obligations must be fulfilled by the trustees of the trusts, who will most likely be the sellers of the shares or assets of a company.
In 2017, HMRC established the online fiduciary registration service (“TRS”), a digital platform designed to enable trustees to fulfill their registration obligations. The goal 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 committing financial crimes. Consequently, a trustee’s failure to comply with its registration obligations in relation to its trust and its beneficial owners is a criminal offense and is punishable by a fine and / or imprisonment.
Trust in business transactions
Trust agreements arise during many business transactions and are used in various ways to hold sums of money, assets or documents belonging to a person other than the trustee. For example, express trusts commonly arise:
In a stock sale where:
- the shares are held by the seller pending registration of the transfer to the buyer
- the consideration amounts are held by the buyer in an escrow account or amounts withheld until the agreed guarantee claim period expires
In a business sale where:
- the Seller holds the benefit of the contracts for the buyer pending the consent of third parties
- The “wrong” provisions assign ownership of assets held by one party but belonging to another
Trusts created in corporate transactions are unlikely to require TRS registration due to the full list of applicable exclusions available in Annex 3A of the AML Regs. The exclusion most likely to apply to trusts arising from corporate transactions is the exclusion of “commercial transactions”. This covers trusts created for the purpose of “allowing or facilitating a transaction made for real commercial reasons; or protecting or enforcing rights … where the use of the trust is ancillary to the primary purpose of the transaction”. Where the transaction involves an escrow agent, any trust should not be registered as there is a specific exclusion for property trusts held on escrow.
The extent of the exclusions means that most corporate transaction trusts (including those listed above) can be classified as “excluded trusts”, provided they are not taxable and therefore not eligible for TRS.
Ultimately, it is the record keeping obligation, not the reporting obligation, that will impose more burdensome obligations on the trustees of the trusts that emerge during corporate operations.
Trustee Record Retention Requirements
The key point for the trustees of the express trusts used in business transactions is the record-keeping requirement which requires them to maintain accurate and up-to-date written records of all trusts and their beneficial owners. It is the duty of the trustees only to keep these records and it should be noted that failure to comply with this constitutes a crime punishable by a fine and / or a prison sentence. The information held on the TRS is not publicly available, but the records must be provided upon request from a law enforcement agency. For more information, HMRC has produced a guide outlining the details that require registration.