When you purchase a property, large sums of money change hands. This makes it susceptible to fraud and means that if you are purchasing a property, you will need to prove how you have obtained the funds to do so.

When you speak to your Solicitor you may hear them saying that they await ‘source of funds.’ Although other solicitors and agents involved in the transaction are aware of what this means, it often causes confusion with our clients as people don’t really know what is required to satisfy this element of the transaction. It is not just a “tick box” exercise where we scan over statements, we are legally required to obtain and check this information. I promise we are not trying to be difficult on purpose or accusing you of doing anything wrong!

We don’t just need to see a statement showing the funds in a bank account, this is the “proof” of funds rather than the “source”. The source of funds will show us how the funds for the transaction have been legitimately earned or obtained. The source of funds we receive should essentially show a paper trail for how the funds originated and then how our client has come to hold these funds and whether they have the authority to use them in a house purchase. An example of this “paper trail” would be that a company pays their employee a salary, the employee saves over x amount of time, and the bank statements show this pattern of earning and saving.

Not all source of funds are the same and some are more difficult to obtain information for than others. We of course understand that the information isn’t always readily available and will sometimes take a little while to filter through to us.

Often we have clients whereby the source of funds, or at least part of it, is coming through a “gift”. The term of something being a “gift” in conveyancing and how the word is used in daily life can differ slightly. A gift is where someone who is not a named purchaser of the property is still contributing money towards the purchase. This gift does not give any rights to reside in the property and does not amount to ownership, there are various forms throughout the transaction that will have the giftor confirm this. If your giftor wants security over their money by way of putting some form of restriction on the title then this can be done alongside as a separate transaction, we would also check that the lender consents to the monies being protected. It is important that if you are getting a mortgage that you explain the circumstances of your gift to your broker/lender so that they can check this is acceptable, some lenders are only happy with certain people giving gifts, such as family members.

If you are unsure on what documents you need to provide due to it being an uncommon source – you can simply ask the team and we are more than happy to tell you. It is much easier to tell you what we need rather than to sift through mountains of documents that you think could possibly help! Whether it be from an inheritance, dividend payments, divorce settlements or just normal savings – we can tell you what we need to make the process as smooth as possible for you, you are just in charge of actually obtaining the required documents to support the source.  

For further advice and assistance please contact our Conveyancing Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

Background

The Trust Registration Service (TRS) is a register of express trusts that have a liability to pay one of the following taxes: capital gains tax, inheritance tax, stamp duty land tax (SDLT) and stamp duty reserve tax. It was introduced in 2017 by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and set out in EU’s Fourth Money Laundering Directive.

The scope of the TRS was extended by the Fifth Money Laundering Directive implemented by the Money Laundering and Terrorist Financing (Amendment) Regulations 2020 which came into effect on 6^th October 2020. Since the Fifth Money Laundering Directive, all trusts (whether taxable or not) need to be registered on TRS unless the trust is specifically excluded.

The trusts caught in the new scope include all UK express trusts and some non-UK express trusts, in existence on or after 6^th October 2020.

In simple terms, an express trust is created by a settlor by way of a written document, such as a Will, deed, or declaration of trust, to take effect either during their lifetime or after their death. Trusts which are implied, arise on intestacy or are created by court orders are not express trusts which are subject to TRS.

Trustee Responsibilities

If you are a trustee of a trust that is registrable, you are expected to register the trust on TRS via the Government Website or arrange for an agent such as an accountant or solicitor to register the trust.

It is important to note that trusts that were in existence on or after 6^th October 2020 but have been closed since need to be registered on TRS and then the trust record must be closed.

Declarations of Trust

Co-ownerships trusts such as declarations of trusts set up by joint property owners to hold property for themselves as tenants in common are excluded from TRS registration requirements. However, the exclusion does not apply if the legal and beneficial owners are not identical. For example, in a scenario where there are two people on the title of the property but three people have a beneficial interest in the property, the trust would need to be registered on TRS.

Penalties

HMRC may issue financial penalties on the failure to register a trust or for late registration of a trust.

There is no penalty for a first offence to register a trust or for late registration of a trust unless the failure to do so is due to deliberate behaviour of the trustee. Where HMRC finds that the failure to register a trust has been deliberate, HMRC may impose fines of £5,000 per offence.

HMRC have stated that they will initially adopt a light touch to penalties if trusts are not registered by 1^st September 2022 given the new registration requirements.

More information about the TRS can be found in the HMRC Trust Registration Manual

For further advice and assistance please contact our Private Client Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

In a last minute dash, the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 were made on 19 December 2019 and came before Parliament the following day. The new Regulations apply from 10 January 2020 in line with the implementation of the Fifth Money Laundering Directive.

What are the changes?

The following are some of the highlights from the amended Regulations.

• Customer Due Diligence (CDD)
  • There is a new obligation requiring regulated businesses to secure proof of registration or similar where the entity is subject to UK company or partnership registration requirements and to report to the relevant Registrar any discrepancies between information on beneficial ownership that the regulated business collects or otherwise becomes aware of and what is stated in the Register. Additional training is therefore required for individuals cross-referencing the information to ensure that internal processes are in place to identify the discrepancies and also to know to whom they should report those discrepancies for onward referral to the Registrar. Generally this would of course be the Money Laundering Reporting Officer’s task.

• • Letting Agents are to apply CDD to any transaction for a term of less than a month and where the rent is at least 10,000 Euros per month for at least part of the term. This criteria applies both to the Landlord and Tenant.

• • For the first time, art market participants are described in the legislation as “people who by way of business trades in, or acts as an intermediary in the sale and purchase of works of art and the value of the transaction, or linked transactions is at least 10,000 Euros.” CDD applies to this category where the transaction or linked transactions are of a value of 10,000 Euros or more in relation to storage of such works.

• • Crypto-asset exchange providers operating machines to exchange crypto-assets for money or vice versa, in relation to any transaction carried out using the machine are now required to take CDD. For reference, the definition of a crypto-asset has also been defined in the new Legislation as “cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically”.

• • The new Legislation also stresses the importance of understanding ownership and control structures of any non-individual customer as well as confirming the requirements to keep written records of relevant transactions taken to identify beneficial owners and to verify the identity of the senior manager managing an entity where the firm has failed to identify the beneficial owner.

• Electronic Verification
  • It is now also expressly stated that information may be regarded as obtained from a reliable source where obtained via appropriate electronic services secure from fraud or misuse and capable to provide an appropriate level of assurance that the person claiming a particular identity is that person. This will be a huge relief for many regulated business relying upon electronic services and for those individuals who do not wish to part with their original passports and driving licence etc.

• Enhanced Due Diligence (EDD)
  • This has been updated slightly to clarify that it applies to any relevant transaction where a party is established in a high risk third country. This is likely to hit most regulated businesses risk assessment in any event and requires more careful analysis that is now formally incorporated in that category. The meaning “established” is to be interpreted as incorporated or having a principal place of business or principal regulator in that jurisdiction, or be resident in that jurisdiction if an individual. It is expected that EDD in these circumstances would include obtaining additional information on the customer, its beneficial owner and intended nature of the business relationship, information on source of wealth and funds of the customer and its beneficial owner, understanding the reasons for the transaction, securing senior management approval and conducting enhanced monitoring all fit this bill too.

• New Product or Business practice launch
  • If a regulated business launches a new product or business practice, appropriate risk assessments must also be undertaken. This historically applied only to new technologies.

• Training Requirements
  • There is also an extension to the training requirements to include agents that are used by the business whose work is relevant to money laundering prevention or compliance.

The dates when the current legislation will fall into place should be considered as effective from 10 January 2020. There are some exceptions to this that will apply to certain categories of regulated business in limited circumstances.

For further advice and assistance please contact our Private Client Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk