US Revocable Living Trusts and HMRC’s Trust Registration Service (TRS)

/ Expat Tax, Individual, Trust, UK Tax

Individuals who are living in the UK and hold their assets in a US revocable living trust will, in many cases, be required to register their trust with HMRC’s Trust Registration Service before 1 September 2022. New rules mean that even non-taxable bare trusts are registrable.

A common issue we come across here at Ingleton Partners are US clients, living in the UK, that have set up a US living trust or variations there of, prior to moving here. These are trusts that are commonly set up by US estate practitioners, for individuals (or jointly for married couples) because they can incorporate the estate planning, covering different permutations with different trusts, maximise use of exemptions, and ensuring the assets within the trust pass outside of probate.

For US tax purposes, during the individual’s life, they are grantor trusts and the individual grantor reports the income and gains in their tax returns and the value of the assets remains within their estate for estate tax purposes. Most clients don’t even notice they have them day-to-day, they are a “nothing”.

But what are they for UK tax purposes….?

This will depend upon the terms of the trust, facts and circumstances and a level of interpretation. In our practice, we are primarily looking to determine whether such a trust can be considered a “bare trust” (which is not really a trust at all for tax purposes much like in the US) with income and gains included on our clients tax return or is it a “substantive trust” which would potentially be required to file its own trust tax return and potentially have income tax, capital gains tax and inheritance tax consequences. The latter issues are particularly acute in the case of UK situs assets or individuals who are or are deemed to be UK domiciled.

Very commonly, the individual who creates this trust is also the trustee and the only or primary beneficiary during their lifetime, they have the power to revoke the trust and they can request any amount of income and/or principal. If this individual is UK resident, then as the sole trustee, what ever type of trust this is it would generally be UK resident.

Having reviewed the terms of the trust and consulted with the individual taxpayer on the surrounding facts and circumstances, it is not uncommon for us to draw the conclusion that such a trust may be treated as a “bare trust”. As such, we include income and gains arising in the individual’s tax return with a white space note disclosure. This position is rarely unequivocal and there is always the risk that HMRC taken an alternate view. We would recommend our clients consult with a solicitor, knowledgeable in this area, who will be able to review the trust instrument, consider the local law, the Uniform Trust Code and potentially advise on amendments that might strengthen the position.

Moving on: new rules introduced on 6 October 2020 relating to HMRC’s Trust Registration Service shines a spotlight on this trust issue.

The Trust Registration Service was originally set up in 2017 and required trustees to register if they had a UK tax liability including liabilities to income tax, capital gains tax, inheritance tax and SDLT. A trust required to register would provide information including details of the trustees, the settlor, property contributed to the trust by the settlor, beneficiaries, protectors and other associated parties who could control the trust. In its previous guise, a bare trust would not have been required to register as it has no UK tax liability (the beneficiary reports and pays tax on the income and gains of a bare trust).
The trust register is not a public record and access to it is limited and use of the information on the register is limited:

“Information held on the register about the people associated with a trust (‘beneficial owners’) may, from later in 2022 onwards, be provided to organisations and persons involved in preventative work in the field of anti-money laundering, counter terrorist financing and associated offences”

From 6 October 2020, the scope of the trust register was extended to include a number of UK and non-UK trusts regardless of whether they had a UK tax liability. Under these new rules for the Trust Registration Service, the majority of bare trusts are no longer excluded and as such it would follow, any client’s bare trust should be added to the register.

HMRC say: “There is no specific exclusion from registration for bare trusts. In general, if a bare trust is an express trust it should register on TRS.”

For a US revocable living trust or any similar arrangement that is treated as a substantive trust, it would have been required to register under the old provisions by way having a liability to UK tax.

However, in what is probably the more common circumstance, where a US revocable living trust has been treated as a “bare trust” for UK tax purposes (whether intentionally or not!), this trust will now be registrable with the Trust Registration Service.

The key point is that whichever treatment applies registration is needed. This will bring some focus on the technical issues and for many clients’ may be the first time they have explicitly referenced the matter with HMRC or discussed the issue in depth with their adviser.

The registration deadline for a non-taxable trust, like a bare trust, is 1 September 2022, for any trust in existence at 6 October 2020. For those formed after or becoming registrable after 6 October 2020 the trust must register within 90 days of becoming registrable or before 1 September 2022. Individuals who are living in the UK and hold their assets in a US revocable living trust should seek advice as action may be required before 1 September 2022.

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