Do I Need to Register a Bare Trust with HMRC?

In the realm of trust law and estate planning, understanding the requirement to register a trust with HM Revenue & Customs (HMRC) is vitally important. This is particularly true for bare trusts, a common tool in asset management and inheritance planning.

With recent changes in legislation and the broadening scope of HMRC's Trust Registration Service (TRS), it is essential for trustees and beneficiaries alike to stay up to date with their legal responsibilities. Failing to register a trust with HMRC could lead to potential legal issues and fines further down the line.

In this guide, Percy Hughes & Roberts Solicitors will explain when you need to register your trust with HMRC and the consequences you could face if you do not. If you have any questions we have not answered, our expert Wills, Trusts & Probate solicitors are happy to speak to you regarding your query and provide the legal services you need. You can contact us by completing the enquiry form below or by calling 0151 666 9090.

What Is a Bare Trust?

A bare trust, also commonly referred to as a simple trust, is a fundamental type of trust arrangement recognised in trust law. It is used by many people as part of their estate plans due to its straightforwardness and often simple structure.  

In a bare trust, the trustee holds assets solely on behalf of a beneficiary or beneficiaries. Trust assets could include property, investments, cash or other assets that the settlor (the creator of the trust) wishes to give away.

Typically, bare trusts are used for managing assets for children or grandchildren until they become old enough to manage money, or for simple transfers of wealth, such as gifting assets to family members or friends. This sometimes offers advantages in terms of UK tax liability, which is another factor that has made bare trusts a popular aspect of estate management.

You can read more about bare trusts here.

Do I Need to Register a Bare Trust with HMRC?

The primary factor that determines whether a bare trust must be registered is its tax liability. This includes Capital Gains Tax, Income Tax, Inheritance Tax, and other relevant UK taxes. If the trust generates income or realises capital gains subject to UK taxation, it likely needs to be registered.

The recent expansion of the TRS has widened the net for registration requirements and impacted bare trusts among many others. The new rules mean that the majority of trusts are likely required to be registered with HMRC.

The specific tax liabilities that necessitate the registration of a trust are:

• Capital Gains Tax (CGT): This tax is levied on the profits (gains) made when certain assets are sold or transferred. If a trust realises gains above the annual exempt amount, it may be liable for CGT.
• Income Tax: If the trust generates income, such as from rental properties or investments, and this income exceeds the available tax-free allowances, the trust may be liable for Income Tax.
• Inheritance Tax (IHT): This may apply when assets are transferred into or out of the trust, or on certain transfers between trusts. The trust may also incur IHT when the settlor dies, and may also incur periodic and exit charges under IHT rules.
• Stamp Duty Land Tax (SDLT) / Land and Buildings Transaction Tax (LBTT) / Land Transaction Tax (LTT): These taxes are relevant for trusts dealing with property or land transactions in England, Scotland, and Wales, respectively. If a trust purchases property or land, or takes on a lease above a certain value, it may incur SDLT, LBTT, or LTT, depending on where it is located.
• Stamp Duty Reserve Tax (SDRT): This tax is applicable when trust assets include shares and securities, and these are bought or transferred in certain circumstances.

If a trust incurs any of these tax liabilities, it is generally required to register with the TRS. It is important to note that the registration requirement is not only based on the current tax status but also on potential future liabilities.

Are There Exceptions?

There are a number of exceptions to the rule requiring trusts to register with HMRC's Trust Registration Service. These exceptions are designed to exempt certain types of trusts that are deemed low risk for tax evasion or non-compliance. Here are some notable exceptions that may apply to your circumstances:

• Trusts for life insurance policies: Trusts that hold only life insurance policies or policies paying out on critical illness or permanent disablement, especially where these policies only pay out on death, are typically exempt.
• Pilot trusts: A pilot trust established before 6 October 2020 with assets not exceeding £100 is exempt from registration.
• Co-ownership trusts: Trusts where property is held in joint names and both parties are beneficial owners (for example, a married couple jointly owning their family home) are usually exempt.
• Will trusts: Trusts created by a person’s will that only come into effect on their death are exempt, provided they hold the estate's assets for up to two years after the person's death.
• Trusts for bereaved minors or young adults: Trusts set up under a will or intestacy for bereaved minors (under 18) or young adults (aged 18-25) are typically exempt.
• Charitable trusts: Charitable trusts that are registered as charities in the UK or are not required to register due to their nature and size.
• Trusts with no tax liability: Certain trusts, despite not falling under the above categories, might still be exempt if they have no UK tax liability. This can include trusts that do not generate income or gains, and where the assets are not subject to Inheritance Tax, Stamp Duty Land Tax, or other relevant taxes.

It is important to note that these exceptions can be subject to specific conditions and criteria, and the regulations surrounding trust registration and taxable trusts are subject to change.

Trustees should seek up-to-date legal advice to confirm whether their trust falls within these exceptions or if registration is required. Solicitors specialising in trusts and estates can provide the most current and relevant guidance in this area. Contact the team at PHR Solicitors to find out more about your liabilities and set up your trust in a legally compliant manner.

What Is the Trust Registration Service?

The TRS is an online system operated by HMRC in the United Kingdom. It was established in 2017 with the aim of preventing money laundering activities.

The TRS requires the registration of numerous UK trusts to comply with the Money Laundering and Terrorist Financing (Amendment) Regulations 2019. Following an update to the regulations in October 2020, it became a requirement for non-taxable trusts, in existence from or after 6th October 2020, to be registered with HMRC by the 1st of September 2022, barring a few exceptions which are limited in scope.

The TRS serves as a central registry for all trusts, providing HMRC with essential information about the trustees, settlors, beneficiaries, and assets of each trust. Trustees are responsible for ensuring that the information on the TRS is accurate and up to date.

Trusts that are exempt from registration are very limited.

What Happens If a Trust Is Not Registered with HMRC?

Failing to register a trust with HMRC when required can lead to several legal and financial consequences. The implications of non-compliance with the Trust Registration Service requirements are significant and can impact both the trustees and the trust itself. Here are the key consequences:

Penalties and fines: HMRC may impose penalties on the settlor or trustees for not registering the trust. The severity of these penalties often depends on the length of the delay and the reasons for non-compliance. In some cases, the fines can be substantial, particularly if the failure to register is deemed deliberate or prolonged.

• Tax liabilities: Non-registration can complicate the trust's tax affairs. It may hinder the trustees' ability to fulfil their tax obligations efficiently, potentially leading to further penalties and interest charges for late tax payments or incorrect tax returns.
• Legal obligations: Trustees have a legal duty to manage the trust in compliance with all relevant laws, including registration requirements. Failure to register a trust when required can be seen as a breach of these duties, which might have legal implications for the trustees.
• Delays in administration: Non-compliance with TRS requirements can cause delays in the administration of the trust, especially when dealing with financial institutions or during the process of distributing assets to beneficiaries.
• Scrutiny and investigation: A failure to register can attract scrutiny from HMRC and other regulatory bodies. In some cases, this could lead to investigations into the trust's activities and the trustees' conduct, particularly if non-compliance is part of broader tax evasion or money laundering concerns.
• Risk to reputation: For professional trustees, non-compliance can damage their reputation and credibility. It may also affect their relationship with beneficiaries and other stakeholders involved with the trust.

Given these potential repercussions, it is crucial for trustees to understand their registration obligations and to ensure that trusts are registered with HMRC where required.