Trust compliance: what do trustees need to do?
As new HMRC reporting obligations come into effect this year, Lorraine Wilson considers some of the legal responsibilities imposed on trustees.
Reporting to HMRC
As well as general legal duties, trustees have a legal obligation to comply with various HMRC reporting requirements.
Under regulations passed earlier in 2021, it is now mandatory for most trusts to register with HMRC’s Trust Registration Service even if the trust does not need to pay any tax. The extension to the registration system has recently gone live and trustees must ensure their trust is registered by March 2022 at the latest. Failure to do so could result in penalties being imposed against the trustees.
Trustees may have to file annual tax returns with HMRC even if there is nothing to report or no tax to pay. If HMRC issue a Notice to File a Tax Return, it is compulsory for the trustees to file a return. HMRC no longer notify professional advisors acting on behalf of a trust that a Notice has been issued, so the onus is on the trustees themselves to take action. Trustees who do receive a Notice to File a Tax Return should let their advisor know immediately so that action can be taken within the relevant time frames.
As well as UK compliance, a trust may also need to register for the Foreign Account Tax Compliance Act (FATCA) and ensure reporting duties are satisfied.
Subject to de minimis limits, trusts must report and pay income tax. The reporting requirements and rates of tax differ depending on the type of trust and the way income payments operate within the trust. It is important to have an in-depth understanding of the trust’s affairs and seek appropriate advice if necessary. Failure to carry out their tax reporting obligations could result in the trustees being liable for penalties imposed by HMRC.
There may also be additional reporting requirements for the disposal of assets by trustees during a tax year (i.e. as well as the annual tax return). New Capital Gains Tax rules were introduced in April 2020 which mean that the disposal or sale of UK residential property must be reported to HMRC (and the tax paid) within 30 days of completion. The system is not easy to use so trustees should ensure they start preparing for this in advance of completion. Again, the onus is on the trustees personally to ensure this is done.
Some trusts are subject to ongoing Inheritance Tax reporting at various stages throughout the life of the trust; on its creation, during the course of the trust administration and on winding up the trust. The specific requirements depend on factors such as the type of trust and the value of trust assets. For example, many discretionary trusts need to pay tax (and file an Inheritance Tax Return) on the 10-year anniversary of the trust’s creation and whenever funds are paid to a beneficiary. Trustees would be best placed to seek professional advice to ensure their reporting obligations are satisfied and they will not be faced with penalties for non-compliance. The cost of professional advice associated with the administration of a trust is a legitimate expense of the trust fund.
Documenting trustee decisions
It is important that trustees ensure their actions are documented appropriately. The payment of funds out of a trust should be documented formally in a Deed of Appointment. Trustee decisions about the management of the trust fund (including decisions about investments and distributions to beneficiaries) should be noted in trustee resolutions and/or trustee meeting minutes.
Trustees should prepare trust accounts on an annual basis and be aware that beneficiaries can ask to see them. As to what information the trustees are obliged to disclose to beneficiaries depends on the type of trust and the nature of the beneficiaries’ interest. Trustees should take advice to mitigate criticism and potential personal liability.
Review of trust investments
Many trustees are not aware of their ongoing duties and leave trust investments in place for many years for administrative convenience. Not only is it sensible planning for trustees to make sure the trust investment strategy is working to achieve the trust’s objectives, but trustees are under a legal obligation to do so. There is a statutory duty imposed on trustees to obtain investment advice from a suitably qualified advisor and to review trust investments on a regular basis.
Where a trust holds real property, the trustees must ensure the property is insured and that the policy is noted in the names of the trustees. An insurance policy taken out by the wrong person (in the wrong capacity) could have serious consequences if a claim ever needed to be made. If the property is occupied by a trust beneficiary, the trustees should ensure this has been properly authorised and documented. Failure to do so could have important tax consequences in the future. Trustees could also face criticism from other beneficiaries for failure to balance competing interests and to act with impartiality.
Acting as a trustee comes with a great deal of legal responsibility. Trustees who fail to carry out their duties properly could be taken to court or face financial penalties imposed by HMRC. Ultimately, trustees can be personally liable if they do not take reasonable care and seek professional advice where appropriate.
If you are a trustee, our Trust administration solicitors can guide you through the process and help to ensure that your legal obligations have been satisfied.