FATCA – Implications on trusts

6 November, 2014
by: Cripps Pemberton Greenish

The Foreign Accounts Tax Compliance Act (FATCA) was introduced by the US tax authorities in 2010. The provisions of FATCA were extended to the UK in September 2012 when the US and UK signed an agreement to implement FATCA in the UK.

Although the provisions cover UK taxpayers, these also extend to all trusts even where it is not obvious that there are any US connections.

The first requirement on trustees is to determine whether registration of the trust with the Internal Revenue Service of the US (IRS) is required and then whether there are any requirements to make a report to HM Revenue & Customs (HMRC). This requires a review of the trust’s classification under FATCA requirements. For existing trusts the suggested registration deadline was 25 October 2014.

Initially, the question of whether there are any US connections is irrelevant. All UK trusts must be classified as either a Financial Institution (FI) or a Non-Financial Foreign Entity (NFFE).

If the trust is classified as a NFFE, registration is not needed. Although there is no immediate requirement, there is a continuing obligation on trustees to keep their trust under review in case the classification changes or a third party such as a bank requires FATCA information about the trust. Confirmation of the classification process should be recorded on the trust records.

If the trust is classified as a Financial Institution, it has to go through the registration process. As a result of registration the trust will be issued with a unique GIIN (Global Intermediary Investment Number). For HMRC reporting purposes trustees will then need to identify any US connections with the trust. Although it may not be obvious that there are any US connections, unfortunately, the US fiduciary laws classify US connections in several ways.  For the purpose of reporting, the rules apply to the settlor of a trust, trustees, a beneficiary that is entitled to a mandatory distribution, i.e. a life tenant, or a beneficiary that receives a discretionary distribution. Client identification will be needed for anyone who has a US connection.

Again, confirmation of the classification process should be recorded on the trust records and kept under review in case the circumstances change. For example, trustees may make a discretionary distribution to a new beneficiary who has US connections.

For any registered trust, trustees will have to submit an annual return to HMRC reporting whether or not there have been payments to beneficiaries with US connections.

Implications of not complying with FATCA

Not complying with FATCA is not an option for trustees.

HMRC will impose penalties for not reporting on any trusts which fall under the FATCA regime.

There are withholding tax implications if trustees do not comply with the rules. This is in addition to any other taxes already suffered.

In due course, we expect that investment managers and banks may as part of their compliance procedures ask for the trust GIIN. This has potential for confusion where the trustees believe that their trust is a NFFE. Where the trustees cannot demonstrate this they are likely to have to effect late registration which will result in penalties.

Reviewed in 2015