Neil Jones of Tavistock Law provides a look at changes to non-resident capital gains tax and how the EU’s Fifth Anti-Money Laundering Directive (AMLD5) impacts trustees.

The year of 2019 was devoid of a budget in the UK which is unusual, but this was due to a lot of parliamentary business and a large amount of time spent debating Brexit. This was compounded by parliamentary paralysis, culminating in a general election. We are now in the transitional period with the exit being approved, but the Government did pass some legislation that may have gone under the radar.

5AMLD and the Trust Registration Service

The role of a trustee is an important one and their responsibilities can be wide and varied, depending on the type of trust they are managing. There is always an element of change and 2020 is no exception, as we start the year with a new consultation following hot on the implementation of 5AMLD – well, most of it. The provisions from the 5AMLD were passed on 20 December 2019 and included in the Money Laundering and Terrorist Financing (Amendment) Regulations 2019. In accordance with the directive, many of the rules came into force on 10 January 2020, however one notable exception was the extension to the Trust Registration Service (TRS).

The existing rules around the TRS require the trustees to register with HM Revenue & Customs (HMRC) when the trust has a ‘tax consequence’ (broadly when a tax liability is assessed on trustees). The extension to the service is required in order to comply with 5AMLD. The proposal is that all ‘express trusts’ will need to be registered within certain timescales and HMRC has issued a technical consultation to fulfil this requirement.

The definition of “express trust” needs to be decided, and the consultation document proposes to de-scope certain trusts: registered pension schemes, charitable trusts, personal injury trusts, trusts only holding a pure protection insurance policy, vulnerable personal trusts, and bare trusts. One of the key purposes of the legislation is to combat money laundering and greatly reduce the risk posed by these trusts.

If the proposals are implemented, existing trusts will have two years to register

If the proposals are implemented, then existing trusts – those in existence on 10 March 2020 – will have two years to register. Those created after 10 March 2020 will need to register before the end of 10 March 2022, or 30 days after creation. Trustees will also have 30 days to make any updates. Until 10 March 2022, all trusts that incur a tax liability for the first time should register on TRS under the current process.

Professional trustees will need to include this requirement to register in their processes, to ensure that they comply if – or more likely when – the rules are implemented. This will be an extra requirement but will then remove the need to register the trust when a tax consequence arises. A self-assessment will still be required, so whether or not this increases costs for a trustee (and therefore the trust) remains to be seen.

The register will create a database of trusts in the UK and the consultation includes a number of questions relating to who can access this information and in what circumstances. This is largely based around investigations into money laundering so the information will not be in the public domain, but for some the confidentiality a trust provides is a key issue.

UK property, capital gains and non-residents

Non-resident capital gains tax (CGT) was introduced in 2015, aimed at taxing non-residents in a similar way to UK residents with regard to any capital gains realised from UK residential property. This follows changes affecting non-domiciles who owned UK property through corporate structures, trusts or a combination of the two; such as trusts owning shares in a company owning UK residential property.

From April 2019, non-resident CGT was extended to all UK property and land held directly or indirectly by non-UK residents, thereby bringing into scope commercial property. “Directly or indirectly” includes assets held in a collective investment deemed to be UK property rich, unless they are deemed exempt.

Any individual or trust realising a gain from UK property will have CGT to pay on this, and if it is realised by a corporate entity then it will be subject to UK corporation tax.

When calculating the gain, if the property or interest in the property was acquired after 5 April 2019 then this is used on the capital gains calculation. If the asset was acquired before that time, then it will be rebased to 6 April 2019 by assuming it was sold and repurchased, or an election can be made to use the acquisition cost.

In addition to this, a further change is proposed from 6 April 2020, where non-UK resident companies carry on a UK property rental business or have income from UK property. These will be liable to corporation tax rather than income tax. As the Government scrapped the proposed reduction in corporation tax, the rate for both of these will be 20% when introduced.

By Neil Jones

Neil is an investment specialist with over 20 years’ financial services experience with life and pensions providers, an investment company and as a professional adviser specialising in pensions, investments and estate planning. Neil has been involved in product development, investment research and training.