New charges shock for family trusts

People who run family trusts are facing expensive new charges due to an international crackdown on financial crime and tax evasion. Savers who’ve chosen to put money into a family trust for long-term tax efficiency or security reasons have been told they will now have to pay hundreds of pounds for a legal entity identifier (LEI) – a unique 20-digit number that will allow financial regulators and tax authorities to identify the parties involved in any financial transaction in any jurisdiction.

The rules, which come into force in January as part of the European Union’s new “MiFID II” regulations, are designed to increase the transparency of transactions, amid concern that criminals and tax cheats are hiding behind elaborate legal structures to conceal wrongdoing. However, the regime will cover almost everyone holding investments through a corporate arrangement, rather than in their own name. This includes thousands of savers with relatively small sums held in trusts.

Such arrangements are used routinely for long-term and legitimate financial-planning purposes – to plan for inheritance tax, for example, or to hold savings on behalf of children or grandchildren. Yet there is no exemption from the LEI requirement for small trusts, or those engaged in everyday planning. Although there have been calls for small trusts to be exempted from the new rules, regulators argue that, because the rules were agreed as part of a G20 initiative, they cannot be watered down.

As many as 162,000 family trusts and estates filed self-assessment tax returns for the 2014-2015 tax year, according to HM Revenue & Customs. All of these will have to buy an LEI if they want to continue trading in shares, bonds, derivatives and many collective investment schemes. As a result, stockbrokers and wealth managers acting on behalf of those who run family trusts have a legal duty to ensure every trust has an LEI by January 3 2018. Trustees can apply directly to the London Stock Exchange for an LEI; the current fee for registration is £115, with an annual charge of £70. Alternatively, investment managers can apply on your behalf and recover the costs from you.

The Financial Conduct Authority’s guidance places no cap on what managers may charge for LEIs, leaving the issue “at the discretion” of the firm, so they could feasibly charge more than the cost of registration. On the very smallest trusts, these charges will have a noticeable impact on returns. Given that the new rules are really aimed at preventing large-scale tax evasion and serious financial crime, it is possible that a minimum trust value threshold might be introduced at some point, but this does not appear to be in the works yet.

That said, while investment managers may have to enforce the rules, they are under no obligation to pass on LEI charges to all customers. Indeed, the new system is widely expected to generate significant savings for asset managers and stockbrokers. The LEIs will streamline transactions, cutting the costs incurred by financial companies when signing up clients in bulk and processing their trades, by as much as 10%, according to research from management consultant McKinsey. As a result, the investment-banking industry as a whole could save more than $150m per year. That certainly bolsters the case of savers with relatively small trusts who could argue that their investment firms should absorb the costs of LEI registration.

Is your pension getting eaten by fees?

Asset managers who run pension funds may soon be forced to publish much more detail about their charges due to growing concern that people are unaware of how much of their returns are being eaten up by fees (see also page 10). The UK regulator, the Financial Conduct Authority (FCA), has been investigating charges in the asset-management sector for more than two years, and is set to publish new standards for reporting of fees before the end of the year. Fees, one-off charges and inflation reduced the returns earned by investors by an average of 29% between 2013 and 2015, according to one recent study by the European Securities and Markets Authority (Esma), an EU regulator.

While individual investors tended to pay higher charges, institutional investors, including pension funds, were also paying too much, warned Esma. In fact, research from campaign group the Transparency Task Force suggests that pension funds in the UK are routinely paying more than 100 charges, many of which are not made clear to investors. Such fees can consume as much as a third of the value of the funds over a lifetime of pension saving. The FCA hopes to design a template for fee disclosure that would require asset managers to publish all charges paid by pension funds in a standard format. The hope is that greater transparency would encourage competition and bring charges down.

Tax insult of the week

In a blow to bridge players everywhere, the European Court of Justice (ECJ) decided last week that the game does not technically count as a sport, and so cannot benefit from tax breaks associated with sports, says James Crisp in The Daily Telegraph. The English Bridge Union had applied to HM Revenue & Customs for a refund on the 20% VAT for the entry fees to its pairs bridge competitions, arguing that the activity should be considered a sport as it “promotes physical and mental well-being”. Despite concluding that the physical element of pairs bridge was “negligible”, thankfully the ECJ has suggested that the game might instead qualify for a tax break given to activities that are “part of a country’s cultural heritage”.

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