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Brexit's Effect On Trusts - An Exploration

Jackie Bennion, 26 March 2019

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What will the impact of Brexit be for those who hold trusts, and how else will it affect their tax affairs? This publication recently talked to a senior private client lawyer.

While Brexit has not changed private client work in any obvious way, it is having a knock-on effect. For one, it has focused the spotlight on how English trusts work for clients, as come January 2020, new money laundering directives will further tighten rules around the transparency of trust ownership by putting more of them on a central register. Also at issue is how jurisdictions across the Channel are jockeying for private client business after Brexit. Whether the UK will be part of these new money laundering directives, like much else at the moment, is unclear, and quite how EU member states will declare their own trust-like structures, as required by the Commission by September, is something UK lawyers are watching with interest.

We broached some of these topics with private client specialist at Russell-Cooke, Richard Frimston. Although he underscored how the privacy and flexibility of trusts have made them the “warp and weft” of English law for centuries, they are not well understood in the civil jurisdictions of Europe, and since the Referendum, the UK has lost much of its ability to defend the role they play in wealth and succession planning.

You are speaking about Brexit to an audience in Brussels next week. What are your talking points given where we are?
There isn’t a great deal to say because generally Brexit doesn’t change a lot of what we do. There will be some things around the edges. From a client's perspective, they are all desperate to get another nationality. And it is trying to guess what some of the unforeseen consequences will be.

For example, if the UK is no longer a member state, not bound by the Court of Justice and treaties, it no longer has to give inheritance tax exemption for business property or business assets or agricultural property outside the UK. So if I have a UK client with a vineyard in France, which is currently exempt from inheritance tax, when he dies what is that likely to look like in five years time? What are the UK tax laws going to look like?

What anxieities do you think you will hear next week?
We have a Spanish practitioner, a Dutch practitioner and a French practitioner who are going to talk about Brexit from their perspective, so just picking up what the world looks like from their point of view is going to be interesting.

My guess is that Spain is full of Brits who are worried silly; whereas Paris is quite excited about lots of French people and businesses coming back; and Amsterdam is also excited about all sorts of things arriving. So I think Paris and Amsterdam will think of themselves as buzzy and going places on the back of Brexit and Spain will see Brexit as a difficulty.

You have said that the biggest concern among your clients is not so much Brexit but the European Commission’s 5th Money Laundering Directive and a stricter disclosure regime that is coming around trust beneficiaries.  Can you briefly explain how we got to the 5th?
The Money Laundering Directives started off really because people were worried about the proceeds of crime and dirty money wandering around the world. Then they got worried about money funding terrorism. But since 2008, the Money Laundering Directives have really been directed at collecting tax. The world’s view of not paying tax varies considerably. In the UK there used to be a clear distinction between evading tax ie, criminally telling lies to the Revenue to not pay tax, and avoiding paying tax, which was doing something legal but doing it in a different way, so there was a distinction.

Those distinctions have blurred over the years, but in some countries, like Switzerland, not paying tax is not seen as a criminal offence - it is seen as a civil issue between you and the taxman. But broadly governments need money and therefore they have used the ML directives to say that evading tax is definitely a criminal offence therefore a money laundering offence.

What changed in the 4th directive?
The 4th ML directive was a response to 2008 and trying to make sure that there was more exchange of tax information. For a long time Oxfam and the Justice Network have been saying that the offshore jurisdictions are responsible for a whole load of tax not being paid, particularly in Africa and developing countries, and if that tax is paid, poverty would diminish. There is a lot of uncertainty over whether that is true or not.

After the Panama Papers, people in parliament said, gosh, this proves that there are lots of nasty people around so even before we have told you what the 4th ML Directive does, we are going to change it. It was at that point that the UK had no voice, because it was the time of the Referendum and the UK was no longer listened to in Brussels.

English law uses trusts as the solution for almost every issue (ownership, succession, unjust enrichment, contractual breach, etc) and other legal systems use such things as matrimonial property regimes, usufructs, fidei commissum, foundations, treuhands, fiducie, etc. The EU 4th and 5th ML directives discriminate against trusts in favour of these other legal structures. The UK was well placed to influence the 4th but, post the Referendum, not the 5th.

The 4th ML directive was the first one to say that we expect trusts to collect information from trustees, beneficiaries, etc, and make it available to tax authorities.

What about the case that even without tax consequences information must now be registered?
Yes, the 5th changes that. It says that any trust, whether it has tax consequences or not, must be reported to the Revenue, and there must be a register that is available to interested parties. This 5th ML is what is concerning clients.

We don’t yet know how the UK will implement the EU 5MLD. Currently it looks as though all express trusts administered in the UK will have to be registered with HMRC, even those that have no current tax consequences. This will include all jointly-owned land in England and Wales, all life policies and pension policies held in trust. There will be millions of these to be registered.

In practical terms, how onerous is that?
It is a completely unnecessary amount of work.  If you’ve got a life policy that pays out money on your death or a pension policy, generally both have no tax consequences. They may not be worth anything at the moment - they are only worth something if you get run over by a bus. But under the 5th, that must be reported revenue and registered.

If you own a flat jointly with somebody else, it is a trust of land, it has no tax consequences, and it isn’t currently registered with anybody. Under the 5th ML Directive, and how the UK implements it, you might have to fill out a form and tell the Revenue about it.  And informaton about that trust might be available to interested parties.

If your daughter has a road accident, for example, and you have a personal injury trust that has no tax consequences, it would have to be registered with the Revenue and its contents, ie, how much it was worth, would have to be available to the public. It raises the question of whether it is wise that that sort of information is available.

There is no guarantee that all member states are actually going to implement the directive promptly or correctly and, under EU law, member states are required to enshrine it in their law by the 10 January 2020.

What is the next big milestone?
Member states have got to produce a list to the Commission by July, which the Commission will publish in September as to the structures, which member states say are trust-like.  So we are all waiting with baited breath for any member state at all saying that any of its structures are like a trust. Cynically, we are thinking they will say no.

Quite how the Commission and the Court of Justice will respond to that we don’t know, but it feels that English law and trusts are not high up the EU’s agenda to look after.

Are there any potential winners in this?
Germany, France, and countries that don’t have trusts under their own mechanisms will, I am sure, have been arguing that their structures are not trust-like structures and the 5th ML Directive doesn’t apply to them.

I am not an expert in the structures used by France or Germany. I know that in Germany a lot of advisors I talked to became very worried when they thought the 5th ML Directive might apply to German treuhands, which is why I am pretty confident Germany won’t include treuhands in their list.  I am not sure what structures the French use. Corporate structures are dealt with differently under the ML Directive. It may be that France uses corporate structures more, but because there is so much concentration on trusts in the 5th ML Directive, I think that non-trust structures will get a boost.

Which ones in particular?
I think foundations, treuhands, various countries have got things called fiducie, like a French law trust. It will be fascinating to see whether France or Belgium or Luxembourg actually list their fiducie as a trust or not.  My guess is that some of them won’t. They fight tooth and nail to protect their own structures.

Given that trusts are part and parcel of English law, what are the deeper implications of this additional disclosure?
I am a pro European, I am a Remainer, I believed in the EU and this is one of the things where I think, well, actually the UK may be better out of the EU. I would rather we be in the EU fully and limited the 5th ML Directive to make it sensible. But since we haven’t, it may be better we are out of the EU and we don’t have to implement it.

How places like the Channel Islands implement it is also politically sensitive. We have had the House of Commons saying the Channel Islands should have a public register even though the Channel Islands doesn’t have representation in the Houses of Parliament, so quite how law is made in the Channel Islands and the political power there is always a bit delicate. Again whether the UK government is going to strong arm the Channel Islands into implementing the 5th ML Directive is also going to be interesting to see.

Clients want privacy but there is a counter argument that these structures need to be more open to prevent misuse.
Well there is purported misuse. Potentially, if you talk to the National Crime Agency in London, they will say they don’t come across the misuse of trusts particularly. If you are a criminal, why would you bother going to a lawyer and using a trust? You just buy a company off the shelf. It is companies that are used for criminal activity. Trusts are used for privacy.

I am not saying there isn’t criminality around but criminals don’t normally have many scruples so they are perfectly happy to lie. Why governments think public registers and trusts are going to stop criminals lying, it is naïve. But it is not really about that, it is about two sides of so many Continental politicians not understanding English trusts - and it is English law so why should they - and the UK government not defending English law; and there being this assumption that if something isn’t registered it must be criminal.

There is talk of the UK becoming more of an offshore centre as it looks for ways to boost the economy after Brexit. What are your views on that?
What we have to look at is the function of London in a declining economy and what that might look like. I don’t know what London is going to look like in five years time. It is still an attractive place to live, though not cheap. Monaco is good if you are old. But for people the lifestyle aspects are an important attraction. I think Lisbon is a great city but do I want to learn to speak Portuguese? 

Given all the cross-border uncertainty, what is occupying most of your time?
It is still classic stuff, which is when does English, French, and German law apply, particularly in succession and estate planning. There is some trust business in Europe but not much. The expertise is in the UK and we are advising a lot to people working on behalf of clients around trusts who are moving themselves out of the UK.

We have new EU regulations on matrimonial property. In England under English law, marriage doesn’t change property rights, whereas in most other European jurisdiction, marriage does change property rights and how that works is quite foreign to English law and petitions. So helping practitioners in the UK and in the EU understand each others’ laws is a good part of my time. Particularly with a lot of financial people leaving London, other places have been faced with the problems that London has had to deal with for the last 30 years. So for Dublin, Paris, Amsterdam, they have many more of these issues to deal with, and therefore need to know some of the answers.

Where do you think it will head next politically?
I presume that we are going to have an extension for perhaps two years and that we are going to be voting in the EU parliament elections and there is going to be lots of emotion and upset and concern still. Personally, I think we are likely to have a general election at some point and possibly another referendum. But whether that actually changes anything I am unsure. The whole process is going to go on and on and on. I am sensing among ordinary people they are so fed up with it, why don’t we just leave and get it over with - not so much because they think that is in their best interests but just that they would like something else on television.

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