United Kingdom: Trusts And Some Facts About FATCA
In March 2010, the US Congress enacted the Hiring Incentives to Restore Employment (HIRE) Act, which included provisions that are known as the Foreign Account Tax Compliance Act, or FATCA. This was aimed at preventing tax evasion by US persons through the use of accounts held with foreign financial institutions. The Act requires financial institutions across the globe to identify and report certain information on US persons that have control over financial accounts. Withholding tax on US sourced payments applies to any financial institution that is not compliant.
In September 2012, the UK and the US signed an Inter-Governmental Agreement (IGA) whereby UK financial institutions would supply information on reportable US accounts to HMRC who would then automatically exchange this information with the US Internal Revenue Service (IRS). The benefit of this is that financial institutions that are covered under an IGA are not subject to the withholding tax on US sourced payments.
The HMRC guidance on the IGA indicates the types of entities that are to be regarded as ‘financial institutions’, including for example certain companies, partnerships and trusts.
The guidance states that where trusts have a portfolio of investments, which are being managed by a professional fund manager under a discretionary investment management agreement, then they will be regarded as ‘financial institutions’ and therefore the trustees will have to comply with the registration and reporting requirements of the Act even though there may not be a US person connected to the trust.
Should a trust not have arrangements in place with a professional manager there are no FATCA requirements, since trusts in this instance will not be regarded as financial institutions.
Also, if all of the trustees are individuals and the trust funds are invested entirely in land or a private property holding company, the trust is not treated as a financial institution and therefore there is no requirement to register or report.
Furthermore, UK Charities which are registered with HMRC and authorised UK pensions are outside the scope of FATCA. However, unapproved pension schemes such as Funded Unapproved Retirement Benefit Scheme (FURBS) will be treated as financial institutions if they are professionally managed on a discretionary basis and will have to register and report.
What options are available to a trust to comply with FATCA?
- The trust can register as a financial institution with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report information on an annual basis. A nil return to HMRC is still required even if there is no information to report
- There is also the possibility of using the ‘owner documented’ approach through your discretionary investment manager if the trust is a ‘closely held’ entity with 20 or less connected persons. Smith & Williamson Investment Management LLP (SWIM) and/or Smith & Williamson Investment Services Limited (SWIS) will be offering this service to discretionary managed trusts with the benefit being that the trust does not then need to register with the IRS as a financial institution or report on an annual basis to HMRC.
- A trust with only individual trustees could appoint a corporate trustee such as Smith & Williamson Trust Corporation Limited. Provided at least one of the trustees is a trust company, that company will itself register as a financial institution and the trust will not have to undertake separate registration or reporting. The corporate trustee will comply with all FATCA requirements on behalf of the trust.
What happens if the trustees do nothing?
If a trust with a professional manager does does not register, use the owner documented approach or have a corporate trustee then the trust will be in breach of UK law and may be subject to penalties from HMRC for noncompliance. Furthermore the trust may then be classified by HMRC as a Non-Participating Financial Institution (NPFI) and, as a result, could be subject to 30% withholding tax on any US source income.
When will the trustees have to register if required?
It is possible to register now and UK trustees will be required to have obtained a GIIN by 1 January 2015 if they wish to register the trust in its own right as a financial institution. To do so, they will have to apply for registration by 25 October 2014.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code: 15/11/2014 exp: NTD197
