HMRC Trust Registration Service: changes for employee trusts

New rules mean that some Employee Benefit Trusts and Employee Ownership Trusts must register with HMRC by 1 September 2022

New rules mean that some Employee Benefit Trusts and Employee Ownership Trusts

Employee Benefit Trusts (EBTs) and Employee Ownership Trusts (EOTs) with certain UK tax liabilities have been required to register with HMRC’s Trust Registration Service (TRS) since June 2017. However, changes introduced by the Fifth Money Laundering Directive mean that, subject to limited exceptions, employee trusts without a relevant UK tax liability may also be required to register by 1 September 2022. Penalties can arise for late registration. This article summarises key considerations to assist trustees – and the sponsoring employer that settled the trust – in assessing whether an EBT or EOT should be registered with HMRC.

Registering taxable EBTs and EOTs

Trustees are required to register an EBT or EOT if it has a liability to UK income tax, Capital Gains Tax (CGT), Inheritance Tax (IHT), Stamp Duty Land Tax or an equivalent devolved tax, or Stamp Duty Reserve Tax (SDRT).

EBTs and EOTs are unlikely to have a liability to income tax if they are funded solely by non-taxable contributions from the sponsoring employer. It’s therefore important to check whether an EBT or EOT has any UK source interest (e.g. from a trust bank account) and review the trust deed to confirm whether it waives dividends on any sponsoring group shares held. Similarly, CGT or IHT charges are unlikely if the trust is set up and run in a way that qualifies for specific employee trust exemptions from IHT and CGT (or is non-UK resident and so outside the scope of CGT). In our experience, it’s share acquisitions that trigger SDRT liabilities, which create TRS obligations, that can sometimes be overlooked.

This is a particular risk where an EBT or EOT without other relevant tax liabilities acquires shares in a UK company (e.g. for an employee share plan or as part of ownership succession planning) and the trustee pays stamp duty, which is not a relevant tax for these purposes, on the transaction. This is because an unconditional agreement to purchase shares in a UK registered company gives rise to an immediate SDRT liability which triggers the TRS registration obligation, even where that liability is subsequently cancelled by the payment of stamp duty on the instrument of transfer. However, no SDRT arises on a subscription for a new issue of shares, or on the purchase of shares traded only on the Alternative Investment Market (or another recognised growth market) or shares held in treasury.

The new registration requirement for non-taxable EBTs and EOTs

An EBT or EOT without a relevant UK tax liability might be required to register by 1 September 2022 if all its trustees are UK resident, or at least one of its trustees is UK resident and its settlor was either UK resident or domiciled when the trust was established, or when further funds were settled.

Other non-taxable EBTs or EOTs may also be required to register if they:

  • Acquire an interest in UK land; or
  • Have at least one UK resident trustee and establish a business relationship with a ‘relevant person’ in the UK, which includes financial institutions, accountants, tax advisers, legal advisers and estate agents.

However, some non-taxable trusts could be excluded from registration. These include trusts that hold certain life insurance or retirement policies, and statutory trusts established under a tax-advantaged all-employee Share Incentive Plan, or set up solely for the purposes of an all-employee Save As You Earn option scheme (‘mixed use’ EBTs would not benefit from this exclusion). Other exclusions can potentially apply, but there is no specific exemption for EOTs.

In practice, the exclusions for tax-advantaged all-employee share plan trusts are likely to be of limited application, as many will incur SDRT liabilities and be required to register as taxable trusts (see above).

Trustees will also be required to register a non-taxable trust where they hold assets on bare trust (e.g. where senior executives’ shares are held under nominee arrangements for commercial confidentiality).

What are the time limits?

The deadline for registering a taxable EBT or EOT depends on when the trust was established and when the first relevant tax liability arises:

Trust established

When the first relevant tax liability arises

Registration deadline

Before 6 April 2021

At any time

5 October following the end of the tax year in which the first relevant tax liability arises if it is income tax or CGT

31 January following the end of the tax year in which the first relevant tax liability arises in other cases

After 5 April 2021

Before 4 June 2022

1 September 2022

After 5 April 2021

After 3 June 2022

Within 90 days of the first relevant tax liability arising

Non-taxable EBTs or EOTs that meet the conditions for registration must be registered on or before 1 September 2022 if they were in existence on 6 October 2020.

Relevant non-taxable trusts created after 6 October 2020 must register:

  • Within 90 days of being created or otherwise becoming registerable; or
  • By 1 September 2022 if later.

What information must be provided to HMRC?

On registration, trustees must provide HMRC with prescribed information relating to the EBT or EOT and its settlor, trustees, beneficiaries, and assets.

Given the potentially large number of individuals who might benefit from an EBT or EOT, HMRC accept that in some circumstances the prescribed information is not required for all potential beneficiaries.

Our understanding is that if the number of named beneficiaries does not exceed 10 individuals, HMRC will require the prescribed information for each individual (plus current directors and ‘key’ employees who are not excluded beneficiaries under the trust deed).

However, if the number of named beneficiaries exceeds 10 individuals, on registration, HMRC require the prescribed information only for current directors and ‘key’ employees (other than excluded beneficiaries). Other potential beneficiaries may be identified solely by a description of their class (e.g. “current and former employees of XYZ Ltd and their dependants”), but full details should be provided if those individuals actually receive distributed benefits from the trust.

HMRC’s guidance describes ‘key’ employees as those with:

  • Overall operational and key decision-making responsibility for the sponsoring employer’s business;
  • Business critical skills and expertise that result in them receiving a high level of remuneration; and
  • Financial ownership or a stake in the sponsoring employer.

It is not clear how this guidance should be applied. For example, should individuals with a ‘high level of remuneration’ be identified in absolute or relative terms (e.g., those earning over £150,000 or the top 10 percent of earners in the organisation)? In an employee-owned business should all employees who hold shares be regarded as ‘key’, or only those with, say, at least 5 percent of the issued shares?

KPMG is engaging with HMRC to clarify these points. In the meantime, EBT and EOT trustees and sponsoring employers should consider what, in the context of the relevant business, is a supportable basis on which to identify ‘key’ employees and disclose that filing position to HMRC when registering the trust.

Trustees of taxable EBTs and EOTs are also required to keep the information on the TRS up to date or confirm annually there have been no changes.

What should EBT or EOT trustees and sponsoring employers do?

The obligation to register an EBT or EOT under the TRS falls on the trustee. However, sponsoring employers have an ongoing reputational interest and governance role in ensuring that employee trusts are registered where required, and that the information provided to HMRC is complete and correct.

Trustees and sponsoring employers should therefore review their EBT or EOT circumstances and confirm whether they should register. Any EBTs or EOTs which should have been registered under the TRS in a prior year should now be registered without delay.

Trustees and sponsoring employers should put appropriate systems in place to ensure that trusts which need not currently be registered are monitored, so registration can be made on a timely basis if they incur a relevant UK tax liability or meet the conditions for TRS registration as a non-taxable EBT or EOT.

Confirming an EBT or EOT’s TRS position can be complex. KPMG in the UK’s trust tax specialists can assist trustees and sponsoring employers to confirm their trust’s position and complete any registrations required.

Regardless of whether a TRS obligation arises, trustees of non-resident EBTs or EOTs may wish to check whether the trust has been notified to HMRC under separate reporting obligations within three months of its establishment. KPMG can also advise on any reporting obligations in this area.