Transparency & trust: enhancing the transparency of UK company ownership and increasing trust in UK business. Discussion Paper, July 2013

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1 Transparency & trust: enhancing the transparency of UK company ownership and increasing trust in UK business Discussion Paper, July 2013 The Society of Trust and Estate Practitioners (STEP) is the worldwide professional association for practitioners dealing with family inheritance and succession planning. STEP members help families plan for their futures, specialising in a wide range of activities, from drafting a relatively simple will to more complex issues surrounding international families, protection of the vulnerable, family businesses and philanthropic giving. STEP helps to improve public understanding of the issues families face in this area and promotes education and high professional standards among its members. STEP has over 18,000 members across 80 jurisdictions from a broad range of professional backgrounds, including lawyers, accountants, trust specialists and other practitioners. In the UK STEP has over 6,500 members and supports an extensive regional network providing training and professional development. In this submission STEP will focus principally on the issues relating to trusts raised in Questions 8 and 9 of the discussion document (page 30). Before addressing the detailed issues raised in the questions, however, it may be useful to clarify some of the broad issues raised about trusts by the discussion document. The motivation for establishing trusts Footnote 33 (page 30) suggest that the distinctive feature of express trusts is that they allow for the automatic passing of title to property upon the death of the person who set up the trust. Avoiding potential problems and delays with probate, etc., is just one of many reasons for using trusts. Express trusts are used for many other reasons and it would be misleading to see trusts as simply an inheritance planning tool. An express trust is more accurately defined as a trust which is intentionally set up 1. This might be for inheritance planning purposes, but it might be for a variety of other reasons. Most UK charities, for example, are supported by a trust structure. It is also extremely common for family businesses to be owned via a trust. The latest available HMRC figures suggest that there are over 160,000 family trusts making self-assessment returns for tax purposes 2, although there are many more (estimates range from several hundred thousand to well over a million) family trusts that do not need to make tax returns because they have insufficient income. 1 See for example, The Law Of Trusts, JE Penner, Butterworths Core Text Series, page

2 HMRC research also confirms that generally the main motivation for setting up a trust relate(s) to having the ability to control assets 3. Issues such as tax efficiency are typically seen as a secondary issue. The most commonly stated reason (in 26% of cases) for the creation of a trust is concern on the part of a settlor that one or more of the beneficiaries are vulnerable, perhaps because of age (e.g. they are too young), a fluctuating mental condition (such as depression), addiction problems or are mentally or physically handicapped. The narrower HMRC definition of vulnerable that excludes, for example, many of those with fluctuating mental conditions, covers around 15% of trusts in the HMRC research. Accessing beneficial ownership information for trusts It is clear from the above that trusts are often established to address sensitive family financial issues, particularly when the trust has been created to help protect vulnerable family members. As a result, trusts in most jurisdictions are regarded as confidential, i.e. information on trusts and the beneficiaries are not publicly available. The treatment of trusts in many ways therefore mimics the treatment of bank accounts details of a family s bank accounts are not generally available to the public. Therefore, in most jurisdictions where trusts are common the primary mechanism for ensuring that information on trust beneficial ownership is available to competent authorities is via requiring trustees to obtain and hold the necessary information and make this available to competent authorities if requested (banks, of course, have similar obligations when it comes to bank account customers). This approach (usually known as reliance on service providers) is fully consistent with the UK s published action plan for the implementation of the Financial Action Task Force. One or two jurisdictions take a different approach and have established trust registers as a source of beneficial ownership information. STEP has produced a survey of the effectiveness of the various mechanisms used to ensure that beneficial ownership information on trusts is readily available to competent authorities. The survey concludes that, based in the evidence of various independent FATF mutual evaluation reports, when judging between the reliance on service providers and the register approaches there is no evidence that, correctly applied, one is more effective than the other in providing key information to investigators. As FATF itself has noted, it matters less who maintains the required information... provided that the information on beneficial ownership exists, that it is complete and up-to-date and that it is available to competent authorities. 4 Requiring the trustees of express trusts to be disclosed as the beneficial owner of a company FATF Recommendations already require trustees to disclose their status when, acting as a trustee, they form a business relationship with financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs). In principle, therefore, the proposal to require the trustees of express trusts to be disclosed as the beneficial owner of a company on any central registry that is established will only

3 constitute an extension of the current arrangements. In practice many trustees already declare their status as such when establishing any business relationship. There would be concern among many trustees, however, if personal information, such as residential addresses, were to be made available to anyone beyond competent authorities. Many trustees are lay trustees (often family members), particularly when a trust has been established as a mechanism to hold a family business. Lay trustees in particular have concerns that making their details freely available over and above what is already available publicly for company directors at Companies House will threaten their legitimate rights to privacy and potentially expose them to risk of abuse. There are also significant concerns about any proposal to make beneficial ownership information available to financial institutions, even if wider access is prohibited. At one level, there is little confidence that restricting access to such information to regulated entities will be adequate in terms of preventing the misuse of such information. At another level, while we are aware that financial institutions regularly make requests for registers that they can then have access to, alongside requests for such a process to grant them a safe harbour for anti-money laundering compliance purposes, STEP (and others) have significant concerns that this can foster a tick box approach to the identification of beneficial owners and is therefore inconsistent with good practice in this area. We note that the force of these concerns about broader availability of beneficial ownership is recognised by the suggestion that there might be a framework of exemptions put in place. This proposal risks adding still further to the bureaucratic burden of the current proposals and offers limited net benefit over the much simpler proposal that most personal information on any register of beneficial ownership should be accessible only to competent authorities (i.e. tax authorities and other official investigatory agencies). The great majority of UK trusts, focused on the protection of vulnerable beneficiaries or family succession issues, are low risk from the point of view of illegal activity or trying to secure inappropriate influence over the affairs of companies they may own stakes in. The Discussion Paper asks for views on the likely costs and benefits of the various proposals. These are hard to quantify but given the relatively low risk-nature of UK trusts it seems prudent to ensure that any mechanism finally adopted entails minimal bureaucracy and disruption. Would it be appropriate for the beneficiary or beneficiaries of the trust to be disclosed as the beneficial owners as well? Under what circumstances? Requiring the disclosure of the beneficiaries of a trust would both pose considerable risks of abuse and be extremely challenging to do so in a way that was effective. As we have noted above, HMRC research has identified that the most common reason for establishing a trust is that at least one of the beneficiaries is considered vulnerable. Disclosure of the names of beneficiaries would therefore come very close to publishing a list of vulnerable individuals who may also have access to funds. The risks of this approach, as well as the challenge to a family s legitimate rights to

4 confidentiality in areas such as arrangements for vulnerable family members are clear. The practical difficulties in implementing any proposal to disclose the beneficiaries of trusts flow from the long-term nature of most express trusts. Generally trusts are drafted very broadly to allow maximum flexibility in the case of unexpected family developments. Many beneficiaries may therefore be discretionary, i.e. they only receive any benefits if the trustees, who may have received broad guidelines on such issues from the settlor of the trust, judge them to be appropriate (this approach is widely used when beneficiaries are considered vulnerable). Other beneficiaries may be contingent beneficiaries, i.e. they will only receive payment if something happens, for example more distant family members may be contingent beneficiaries since they will only receive benefits from the trust if closer family members pre-decease them. Finally beneficiaries may be defined as classes (for example my grandchildren ), which expand or contract over time. The result of these considerations is that the beneficiaries of a trust can change over time and that many of the beneficiaries might well in reality never receive any benefits from the trust. The result is that those jurisdictions operating trust registers often have to grapple with poor compliance in terms of ensuring that any list of beneficiaries is complete and up to date (particularly in the case of lay trustees), or high compliance costs as trustees have to perform an annual check on the status of all classes of beneficiaries and contingent beneficiaries. In addition investigatory authorities often find such trust registers of limited use because of the large numbers of beneficiaries who in reality are unlikely to receive benefits from the trust. It is typically easier, therefore, to obtain relevant information about a trust by directly approaching trustees (i.e. the obligations on service providers approach as noted previously). The primary aim of the proposal to improve transparency is to establish beneficial owners with an interest of 25% or more in a company. This threshold level can cause further practical difficulties for trustees if this is to be applied to individual beneficiaries. Some beneficiaries, for example may be entitled to the income from a trust fund, while others are entitled to the capital. Similarly discretionary beneficiaries may have no fixed entitlement to any part of the trust fund. In these circumstances, even if the trust itself has an interest in 25% or more of the company, any listing of the beneficiaries of the trust is likely to include many who are some way from having a 25% interest. The Discussion Paper raised the particular circumstances in which beneficiaries have the express power to control the trust s acquisition or disposition of the shares, the way in which the trust exercises the rights associated with the shares; or the way in which the trust otherwise controls the company. Such a trust would be a bare trust and most typically would be found in a commercial context. Client funds may be held in a trust account and may only be disbursed on the instruction of the client (the beneficiary). In the family context, bare trusts are most commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary reaches the age of majority when the beneficiaries can demand that

5 the trustees transfer the trust fund to them. Bare trusts are transparent for income tax purposes (i.e. the beneficiary is liable for any tax due on the trust income). In the context of requiring beneficiaries to be disclosed in such circumstances, many of the issues raised above would surface, not least because in practice quite often the beneficiaries would still be minors. STEP 12/9/2013