Wealthy Russians who own property or receive income from sources in the UK through an offshore trust should be worried.
Over the past few years, the number of laws on the exchange and disclosure of information in different countries has increased significantly as part of the global trend of the struggle for transparency of information. But their effects may be broader than it seems to individuals. The result of some of these measures introduced may be the disclosure of information about persons not only in their countries of residence but also in countries in which they indirectly invest through structures. The combination of various international and local information disclosure regimes makes taxpayers less predictable and leads to risks of loss of confidential information of taxpayers and disputes with tax authorities when discrepancies are detected, which is almost inevitable given the differences in requirements of these regimes.
One such example is the Register of Trusts, which was introduced in the UK in 2017 as a result of the implementation by the UK of the EU Fourth Directive on the Prevention of Money Laundering. It serves both as a consolidated register of data on beneficial owners of trusts and an administrative resource for trustees to file tax reports with the UK tax authorities. The new legislation applies to both UK resident trusts and offshore trusts that have tax liabilities in the UK (own property or receive income from UK sources). And this applies even to those cases where persons associated with a trust live outside the country. Tax liabilities include taxes on income and capital gains, capital gains tax for non-residents, inheritance tax and stamp duties (this means that when applying for exemption from tax or the occurrence of other types of taxes and fees (for example, VAT), it is not necessary to register them). It is important to note that the obligation to register offshore trusts arises only if tax liabilities appear at the trust itself, and not at the companies they own. The exception to this rule will be only the use of nominal companies.
What data and when is it necessary to disclose? The responsibility for registering a trust lies with the trustees. Unlike some other international agreements on the exchange of information, disclosure obligations in accordance with the rules of the Register of Trusts are broader and include the identity of the founder/founders (including deceased persons); trustees, beneficiaries and all other “controlling” persons. It is important to note that these rules interpret the definition of “beneficiary” very broadly, namely, include all of the named beneficiaries and persons who can be identified as “possible” beneficiaries in trust documents, including letters of a wish. Such a definition and requirement is significantly different from international information exchange regimes.
Information about such persons must include their name, date of birth, social security number, tax number in the UK and (if they are not residents of the UK) their passport details. In relation to a trust, information must include its name, date of establishment, valuation of assets, a country in which it is recognized as a tax resident, contact address, and details of agents acting on behalf of trustees, and even their lawyers and other consultants. The trustees are also obliged to keep records of all changes in the above data, which they are obliged to disclose to the supervisory authorities upon request, and also to register with the Registry within the stipulated time limits.
The first registration dates on January 5 and 31, 2018 were established for trusts whose tax obligations arose in the 2016/17 tax year (with different conditions), the subsequent periods depend on the periods in which the trust has tax consequences, their types, and availability in previous periods. Failure to comply with the requirements of this legislation threatens with fines, and in special cases – with criminal prosecution.
Is the information in the Registry public? To date, the information entered in the Register is closed and is available only to the supervisory authorities. However, the UK is facing a decision on the implementation of the EU Fifth Directive, which comes into force in May of this year (all EU countries must implement it over the next 18 months). If the Directive is implemented, the information in the Register of Trusts should be made publicly available. Earlier, the United Kingdom stated that access to the Registry would be limited, but the position on this issue in the conditions of the coming British withdrawal from the EU has not yet been precisely confirmed.
Do these rules apply to you? Yes, if you own property or receive income from sources in the UK through an offshore trust.
For example, if an offshore trust established by a non-resident of the United Kingdom (for example, living in Russia) invests directly in residential real estate, the obligation to register for the relevant tax period with the trust’s managers will arise when performing the following operations: 1) the trust must pay stamp duty), 2) upon the sale of the object or another retirement of the object from the trust (when the managers pay the capital gains tax for non-residents), when the property is leased (the managers will pay income tax), as well as 4) upon the occurrence of events that entail the payment of the inheritance tax by the trust managers (loss of property, death of the founder in some cases, etc.).
Since April 2017, trusts who own real estate properties through companies or provide funding to other structures or individuals for the purpose of investing in residential real estate in the UK, have new tax liabilities on inheritance tax in the UK. However, the tax authorities in the last explanations confirmed that in the event of such tax liability arising there is no obligation to register a trust for the relevant tax period. Nevertheless, it cannot be ruled out that the position on this issue may change, therefore, persons affected by these rules should be monitored for changes.
Another example is the purchase of shares of a British company through a trust: such an operation involves the payment of stamp duty, and therefore also results in a registration requirement.
What else should be considered when investing in the UK? Currently, it is not necessary to register trusts in case of tax obligations with offshore companies that they own. But it is important to remember that since 2015, the UK has a public register of controlling entities of British companies (PSC Register), so information about trusts that own British companies is also publicly available. And from 2021, the UK plans to introduce a public register containing information on the beneficial owners of offshore companies that own real estate in the UK. Thus, all information about persons owning real estate in the UK through offshore trust and corporate structures may become public in the future.