Since new supervisory legislation came into force on 1 January 2020, trustees in Switzerland are now subject to regulatory supervision from that date by the Swiss Financial Market Supervisory Authority (FINMA). Trustees will not only be subject to supervision with regard to combating money laundering and terrorist financing, but also to FINMA’s approval with regard to their actual business activities. As well as demonstrating sufficient experience and knowledge of the trust industry, trustees will need to show pertinent knowledge of applicable foreign law to obtain a trustee licence, as trusts are always subject to foreign law. The supervision of trustees will be carried out by one or more of the newly established supervisory organisations authorised by FINMA. Any person who intentionally (or through negligence) carries out trustee work without the appropriate licence is liable to a prison sentence of up to 3 years or a fine of up to SFR 540k (or for legal entities SFR 5m).
What could this mean for existing trustees?
We can expect to see further consolidation in the Swiss trust industry with some trustees giving up their trusteeships in favour of corporate trustees who have sufficient scale and resources to deal with all the new regulatory changes. Depending on the facts, they could remain as an adviser to the family or the new trustees so that all of the knowledge that the original trustee has built up is not lost; especially given the paucity of information in some trust cases. As of 1 January 2020, existing trustees must report to FINMA within 6 months of that date (i.e. by 30 June 2020). They then have until 1 January 2023 to comply with the new rules and apply for an authorisation from FINMA.
What do the new trustees need to consider?
When taking over new trust structures it will be very important that the new trustees are aware of what they are taking on e.g. any historic tax or regulatory issues. Therefore it would be sensible, prior to taking on the trusteeship, to undertake a review of the key points so that any issues can be identified. This will not always be straightforward, particularly where no accounts have been prepared historically.
What kind of issues may arise on review of the structures?
UK residential property in particular can lead to unexpected tax liabilities. For example where a UK resident beneficiary has resided rent-free in a trust property and as a consequence has a benefit charge due against that occupation. Whilst not strictly the trustees’ liability, the trustees would likely want to ensure that they are in a position to provide details of income and/or capital gains to enable the UK beneficiaries to fulfil their reporting obligations.
Another issue that can arise with UK residential property, especially where it’s held directly by the trust, is that UK Inheritance Tax (IHT) may be owed in respect of the Ten Year Charge (TYC) that applies on the 10th anniversary of the creation of the trust. The position has been further complicated by the recent expansion of the IHT rules to include UK residential property where held via an underlying offshore company. In addition, loans made to beneficiaries to purchase, maintain or enhance UK residential property are also now subject to UK IHT as these are deemed UK assets. The new rules apply from 6 April 2017 and it is possible that a 10 year anniversary of the creation of the trust has arisen since April 2017 and that a TYC has already been missed.
Another common area of oversight is where UK income such as rents, dividends and bank interest is received direct by the trust. In that case the trustees themselves may have an obligation to complete a UK tax return and account for UK tax on that income.
What should the new trustees do if they find any issues?
It is usually still best to make a voluntary disclosure to HMRC via the worldwide disclosure facility. Although HMRC’s Requirement to Correct initiative has now introduced fairly punitive penalties for failures to disclose liabilities from offshore matters for past years, it is still worth reviewing in detail the reasons behind a disclosure as this can, in certain circumstances, mitigate how far back HMRC can go to collect past years’ undeclared taxes and any penalties due.
BDO have experience both in dealing with Swiss regulatory issues via our Swiss firm and dealing with all UK tax matters arising from trust structures with a UK nexus (including support with trust accounting). In particular, we are currently working on scenarios where trust accounts, and income and capital gains pool computations, were not prepared by the original trustees and the new trustees are looking to recreate the relevant accounting income and tax pools from scratch and often with incomplete records.
Get in touch with BDO’s Swiss-based experts or your usual BDO UK adviser:
Head of Tax Zurich and Private Client Services
Dr Fabian Schmid
Head of Regulatory & Compliance, Partner