Fifth Money Laundering Directive consultation: Charitable trusts not required to register with Trust Registration Service

*Update: Both sifting committees have given their recommendation for this statutory instrument.*

The Fifth Money Laundering Directive (5MLD) expands the scope of the Trust Registration Service (TRS) register by requiring trustees or agents of all UK and some non-EU resident express trusts to register those trusts with the TRS, whether or not the trust has incurred a UK tax consequence. The original  consultation indicated that charitable trusts were likely to fall within the definition of an express trust and therefore would have to register.

The money laundering and terrorist financing (amendment) regulations 2019 (MLRs) come into force on 10 January 2020, but no reference was made to changes to the Trust Registration regime.

The Government then launched a detailed technical consultation on extending the TRS to include the draft legislation and proposals on the types of express trusts that will be required to register, data collection and sharing, and penalties. Importantly, the Government proposed that “charitable trusts are not in scope to register because the risk of these kinds of trusts being used for money laundering or terrorist financing activity is low”.

CTG’s response to the technical consultation welcomed this proposal. John Hemming, CTG Chairman, commented:

“This is a great outcome for charities and vindicates the responses made by CTG and other sector bodies to the original consultation that charities were low risk and should be excluded from registering with the Trust Registration Service. This is a great example of common sense prevailing particularly as the rules would otherwise have applied regardless of whether or not the trust has incurred a UK tax consequence. We are aware that very small charitable trusts, including those that are excepted from registration with the charity regulators, could have been caught, which would have been unduly onerous, given their limited resources”.

As outlined in this commentary, the proposed changes to TRS could have been very onerous for charities.

However, CTG also noted:

However, we believe that the draft amending legislation (Appendix A at Para 1 (2) – inserting new Reg 45ZA(2)(e)) does not fully achieve this objective. There are two concerns here, that have been confirmed by charity lawyers:

  • If incorporated charities (for example Companies Limited by Guarantee or Charitable Incorporated Organisation (CIO’s)) hold either restricted funds or endowment funds, we believe that, as currently drafted, these may still need to be registered on a fund by fund basis.
  • There is a considerable backlog of charity registrations with CCNI in Northern Ireland and, in addition, CCNI has yet to call all charities there forward for registration. As such, these currently unregistered charities will need to register with HMRC under the TRS unless their registration is completed before March 2022.

We are fairly sure that this is an unintended consequence of the draft legislation.

HMRC has published a summary of responses to the Technical Consultation on the Fifth Money Laundering Directive (5MLD) and Trust Registration Service (TRS). The response notes that 13 respondents (including the Charity Tax Group) welcomed the proposal to exclude charitable trusts on the grounds that they are regulated elsewhere. However, it was noted that under the draft regulations charities in England and Wales with an income of under £5,000, as well as charities in Northern Ireland that are waiting to register with the Charity Commission for Northern Ireland (CCNI) would need to register on TRS, because they are not currently registered by the relevant body. Respondents, including CTG, suggested that as these trusts still follow the relevant charity guidance and procedures, they should be excluded from registration on TRS.

The government has taken respondents’ views into consideration when determining which trusts will be exempt from registration. Further details of the parameters of these exemptions can be found in the legislation and will be covered in the forthcoming guidance. In general, the following types of trusts will be exempt from registration on TRS, including charitable trusts regulated in the UK.

The proposed regulations have been laid for consideration by the European Statutory Instruments committee in the House of Commons and the Secondary Legislation Scrutiny Committee in the House of Lords.