Investor nominee arrangements and the Trust Registration Service

HMRC has indicated that nominee arrangements, under which shares and loan notes subscribed for by an investment fund are held by a nominee, must be registered under the Trust Registration Service.

What is the Trust Registration Service?

The Trust Registration Service (TRS) is HMRC’s register of the beneficial ownership of trusts. Although it originally applied only to taxable trusts, the remit of the TRS has been extended so that it now applies to all UK express trusts, regardless of whether or not the trust is liable to pay tax. An express trust is one which is deliberately created by the settlor, usually by a written document such as a written deed or declaration of trust (as opposed to a trust which arises by operation of law).

The obligation to register falls on the trustees of the relevant trust who must provide information about the trust itself as well as its beneficial owners (such as the settlor and beneficiaries). In addition, the trustees are required to keep accurate and up-to-date written records containing details of the trust’s beneficial owners.

Private equity nominee arrangements

Most private equity investment funds are structured as UK limited partnerships. When a private equity fund invests in a portfolio company it will usually subscribe for shares and loan notes in that company. Those shares and loan notes will typically be registered in the name of a nominee on behalf of the fund, partly because a limited partnership is not a separate legal entity, so cannot itself hold assets, and partly because of regulatory requirements which mean the fund’s investments must be held separately from its own assets.

So the nominee holds the shares and loan notes on behalf of the fund. This type of bare trust or nominee arrangement is caught by the TRS. The fact that the trust is a legal necessity, because the fund cannot hold property in its own right, is irrelevant.

Does an exemption apply?

Although the TRS applies to all express trusts, there are certain exemptions which can remove the need to register.

In particular, there is a ‘commercial transaction’ exemption which applies to trusts created for the purpose of enabling or facilitating a transaction effected for genuine commercial reasons. However, HMRC will generally only accept that this applies where the trust or nominee arrangement is short lived on the basis that, for the exemption to apply, the trust must be incidental to a particular transaction and transactions are, by their nature, generally time-limited events.

Note also that even if an exemption does apply, this operates to exclude the trust from the registration requirement but it does not exempt the trustees from the record-keeping obligations.

HMRC has indicated to us that the commercial transaction exemption will not apply to investor nominee arrangements.

What should funds do now?

While every situation will turn on its own facts, HMRC’s approach indicates that investor nominee arrangements should be registered with the TRS. If the nominee agreement covers all property held for a limited partnership fund, it is likely that only one registration will be required for the fund rather than a new registration each time a new investment is made and additional assets are registered in the name of the nominee.