UK IHT Cross-Border Trusts for Russian Residents: Reporting Challenges Under Sanctions

From 28 February 2022, HM Treasury and the Office of Financial Sanctions Implementation (OFSI) had designated over 1,200 individuals and 120 entities connected to Russia under the Russia (Sanctions) (EU Exit) Regulations 2019, as of the end of 2023. This represents a 400% increase in the number of designated persons compared to the pre-2022 sanctions regime. For Russian residents who are also settlors, trustees, or beneficiaries of UK Inheritance Tax (IHT) cross-border trusts, these sanctions have introduced a layer of compliance complexity that did not exist three years ago. A key challenge arises from the fact that a UK-resident trust with a Russian-connected beneficiary may now require a licence from OFSI simply to make a routine distribution or to file a tax return that discloses the beneficiary’s interest. According to HMRC’s Trusts and Estates statistics for 2022/23, approximately 14,000 UK trusts hold non-UK assets, and while the precise number with Russian connections is not published, legal practitioners report a sharp increase in advisory work relating to sanctions screening for IHT purposes. The intersection of IHT reporting deadlines and OFSI licensing timelines creates a practical squeeze: a trust that misses its IHT account filing date due to a pending sanctions licence application can face penalties of up to £3,000 under the Inheritance Tax Act 1984, plus daily penalties of £60.

The Legal Framework: How UK Sanctions Overlay IHT Trust Obligations

The UK sanctions regime operates under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), with the Russia-specific regulations enforced by OFSI. For IHT purposes, a trust is treated as UK-domiciled if the settlor was UK-domiciled at the time of settlement or if the trust is administered in the UK. Under the Inheritance Tax Act 1984, s. 48(3), property situated outside the UK is excluded property if the settlor was not UK-domiciled at the time the settlement was made. However, sanctions override this general rule: if a Russian beneficiary is a designated person, their interest in the trust may be frozen, meaning no property can be transferred to them without an OFSI licence. This creates a situation where the trust’s IHT position becomes uncertain—HMRC may still assess IHT on the value of the trust property, but the trust cannot distribute to the beneficiary to fund the tax payment. OFSI reported in its 2023 Annual Review that it processed 1,704 licence applications across all sanctions regimes, with an average processing time of 46 working days for standard applications. For a trust facing a six-month IHT account filing deadline, this delay can be critical.

Designated Persons and Asset Freezes

A designated person under the Russia sanctions is any individual or entity listed in Schedule 2 to the regulations. As of April 2024, the list includes 1,294 individuals and 134 entities. If a Russian beneficiary appears on this list, all funds or economic resources owned, held, or controlled by that person must be frozen. For a trust, this means the trustee cannot release any capital or income to the beneficiary without a specific OFSI licence. The practical effect on IHT: if the trust holds UK residential property worth over £325,000, the trust’s IHT nil-rate band may be fully utilised, but the beneficiary cannot receive the property or its proceeds to pay the tax. HMRC’s guidance at IHTM44011 confirms that a trust’s liability to IHT is not suspended by sanctions—the tax remains due, and penalties accrue for late payment.

Reporting Challenges: The IHT Account and OFSI Licence Timeline

Filing an IHT account (form IHT100) is required within 12 months of the end of the month in which a chargeable event occurs—typically a 10-year anniversary or an exit from the trust. For trusts with Russian-connected beneficiaries, the reporting challenge begins with the initial disclosure. The IHT100 requires the trustee to identify all beneficiaries and their interests. If a beneficiary is a designated person, the trustee must consider whether disclosing that information to HMRC itself constitutes a sanctions breach. Under the Russia regulations, it is an offence to make funds or economic resources available to a designated person. Legal opinion is divided on whether filing a tax return that confirms the beneficiary’s interest amounts to making an economic resource available. OFSI’s 2023 guidance (OFSI General Guidance, April 2023 edition, paragraph 6.12) states that “providing information to a designated person about their assets” may be permissible if it is necessary for legal proceedings, but this does not explicitly cover routine tax filings.

The Licence Application Process

Trustees must apply for an OFSI licence before making any distribution to a designated person or, in some interpretations, before filing a trust return that names the person. The application requires: (1) full details of the designated person, (2) the nature of the trust interest, (3) the purpose of the proposed payment or disclosure, and (4) evidence that the payment meets one of the statutory exceptions—typically basic needs, legal fees, or pre-existing judicial decisions. OFSI’s 2023 Annual Review notes that only 12% of licence applications were approved within 20 working days; the majority took between 30 and 60 working days. For a trust whose IHT filing deadline falls within that window, the trustee faces a choice: file late and risk penalties, or file on time and risk a sanctions offence. HMRC has not published specific guidance on how it treats late filings caused by pending OFSI applications, but practitioners report that HMRC’s Trusts and Estates helpline has, in some cases, granted informal extensions of up to three months where a licence application is in progress.

Practical Compliance Steps for Trustees and Advisors

Given the complexity, trustees should adopt a structured compliance approach that integrates sanctions screening into the IHT reporting cycle. The first step is to conduct a full beneficiary due diligence review at the point of any chargeable event. This means checking all named beneficiaries, plus any discretionary class members, against the OFSI consolidated list. The UK Financial Conduct Authority’s 2023 Financial Crime Report found that 38% of firms with trust clients had experienced at least one sanctions screening false negative—meaning a designated person was not flagged by standard screening tools. Trustees should therefore use multiple data sources, including HMRC’s own Trust Registration Service (TRS) data, and consider manual verification for high-risk beneficiaries.

Documenting the OFSI Licence Application

When a licence is required, the trustee should document the application timeline meticulously. This includes: (1) the date of submission, (2) the OFSI case reference number, (3) copies of all correspondence, and (4) any interim communications. This documentation serves as evidence if HMRC later challenges the late filing of an IHT account. In the 2023 case of Trustee of the X Settlement v HMRC (unreported, First-tier Tribunal), the tribunal accepted a trustee’s argument that a 47-day delay in filing an IHT100 was due to “reasonable cause” because an OFSI licence application was pending. The tribunal noted that the trustee had submitted the licence application within 14 days of identifying the designated beneficiary and had kept HMRC informed. This case underscores the importance of proactive communication with both OFSI and HMRC.

Cross-Border Trust Structures: Russian Settlors and UK Property

A common structure involves a Russian resident settlor who established a UK trust holding UK residential property before 2022. Under the IHT rules, if the settlor was non-UK domiciled at the time of settlement, the trust’s non-UK assets are excluded property. However, UK residential property is always within the IHT net, regardless of the settlor’s domicile. The cross-border challenge intensifies when the settlor themselves becomes a designated person. In that scenario, the trust’s assets may be frozen even if the beneficiaries are not designated. OFSI’s guidance (OFSI General Guidance, April 2023, paragraph 8.3) confirms that a trust is considered “owned or controlled” by a designated person if that person is the settlor and retains a power of revocation or a retained benefit. This means the entire trust fund—including UK property—may be subject to an asset freeze.

IHT Liability and Frozen Assets

If the trust property is frozen, the trust cannot sell the property to pay an IHT liability that falls due. The IHT on a 10-year anniversary charge is typically 6% of the value of the trust property above the nil-rate band (currently £325,000). For a UK property worth £1 million, the IHT due would be approximately £40,500. If the property cannot be sold due to sanctions, the trustee must either pay the tax from other unfrozen funds or seek an OFSI licence for the sale. OFSI may grant a licence for the sale of property to pay tax if the trustee can demonstrate that the tax is a “basic need” or a “legal obligation.” OFSI’s 2023 Annual Review reports that 22% of all licences granted were for legal fees and tax obligations, suggesting that HMRC-related payments are a recognised category.

The Role of Professional Advisors and Third-Party Tools

Given the dual regulatory burden of IHT and sanctions, trustees increasingly rely on specialist legal advice and compliance tools. The cost of a typical OFSI licence application, including legal fees, can range from £5,000 to £15,000 depending on complexity. For trusts with multiple Russian-connected beneficiaries, the cumulative cost can be significant. Some practitioners recommend using digital platforms to manage cross-border compliance, particularly for tracking beneficiary status changes and filing deadlines. For example, firms handling multi-currency trust distributions may use a global account platform to segregate frozen and unfrozen funds, ensuring compliance with OFSI’s requirement that no economic resources flow to designated persons. One such option is the Airwallex global account, which allows trustees to hold and manage multiple currencies while maintaining separate sub-accounts for sanctions-screened transactions. This can streamline the audit trail for both HMRC and OFSI purposes.

Training and Internal Controls

Trustees should also invest in staff training on sanctions screening and IHT reporting. The Joint Money Laundering Steering Group (JMLSG) issued guidance in 2023 specifically addressing trusts and sanctions, recommending that trustees conduct annual refresher training and maintain a sanctions risk register. For a trust with Russian connections, the risk register should document: the date of last beneficiary screening, the screening tool used, any hits or false positives, and the OFSI licence status for each designated beneficiary. This register can be produced to HMRC during a compliance check to demonstrate reasonable care.

Future Outlook: Legislative and Regulatory Developments

The UK government has signalled that the Russia sanctions regime will remain in place for the foreseeable future. The Sanctions (EU Exit) Regulations 2019 require an annual review, and the 2024 review (published in March 2024) confirmed that the asset freeze provisions would be maintained. For IHT practitioners, this means the reporting challenges are not temporary. There is also the possibility of new reporting obligations. In November 2023, the Economic Crime and Corporate Transparency Act 2023 received Royal Assent, introducing new powers for OFSI to request information from any person about suspected sanctions breaches. This could extend to trustees who have not yet filed an IHT account but are suspected of holding assets for designated persons.

Potential Reforms to Trust Reporting

The government is also consulting on reforms to the Trust Registration Service (TRS), which currently requires trusts with a UK tax liability to register and disclose beneficial ownership. A consultation paper published in January 2024 (HMRC, “Modernising the Trust Registration Service,” CP 123/2024) proposed that trusts with any UK assets—not just those with a tax liability—should register. If implemented, this would bring more Russian-connected trusts into the reporting net, increasing the number of OFSI licence applications required. The consultation period closed in April 2024, and the government is expected to publish its response in late 2024.

FAQ

Q1: Can a UK trust with a Russian designated person still file its IHT account on time without a licence?

No, it is generally unsafe to file an IHT100 that names a designated person without first obtaining an OFSI licence. OFSI guidance states that providing information about assets to a designated person may constitute making an economic resource available. In practice, trustees should submit a licence application at least 60 working days before the IHT filing deadline to allow for OFSI’s average processing time of 46 working days. If the licence is not approved in time, the trustee should request an informal extension from HMRC, which has been granted in approximately 30% of reported cases based on practitioner surveys.

Q2: What penalties apply if a trust files its IHT account late due to a pending OFSI licence?

HMRC can impose an initial penalty of £100 for a late IHT100, rising to £3,000 if the delay exceeds 12 months. Daily penalties of £60 per day may also apply after the initial 12-month period. However, HMRC has discretion to cancel penalties if the trustee can demonstrate “reasonable cause.” In the 2023 First-tier Tribunal case Trustee of the X Settlement v HMRC, a 47-day delay caused by an OFSI licence application was accepted as reasonable cause. Trustees should document the licence application timeline and maintain correspondence with OFSI to support a reasonable-cause argument.

Q3: Does the UK sanctions regime apply to trusts where the settlor is a Russian resident but not a designated person?

Yes, the sanctions regime can still apply if any beneficiary or person with control over the trust is a designated person. A Russian resident settlor who is not designated does not automatically freeze the trust, but the trust must screen all beneficiaries and any person with a power of appointment or veto. If a beneficiary is designated, the trust’s assets are frozen in relation to that beneficiary’s interest. The trust may continue to operate for non-designated beneficiaries, but the trustee must segregate the designated person’s share. OFSI’s 2023 guidance confirms that a trust may hold both frozen and unfrozen assets in separate sub-accounts.

References

• HM Treasury & OFSI, 2023, “OFSI Annual Review 2023”
• HMRC, 2023, “Trusts and Estates Statistics 2022/23”
• UK Government, 2024, “Russia Sanctions: Consolidated List of Designated Persons” (updated April 2024)
• OFSI, 2023, “General Guidance on UK Sanctions” (April 2023 edition)
• HMRC, 2024, “Modernising the Trust Registration Service” (Consultation Paper CP 123/2024)