UK: Trusts And FACTA – Foreign Account Tax Compliance Act

FATCA will have an impact on virtually all trusts regardless of whether they have any US connection. Trustees must consider their status under FATCA as soon as possible to ensure that they comply with its provisions.

What is FATCA?

FATCA is an anti-avoidance measure introduced by the US authorities which requires financial institutions (FIs) outside the US to pass on information about financial accounts held by US taxpayers or by foreign entities (including trusts) in which US taxpayers have an interest. It also covers payments made to US beneficiaries of trusts. Finance Act 2013 introduced the UK-US intergovernmental agreement (IGA) to improve international tax compliance into UK law and implemented FATCA.

Trusts and FATCA

From a trust perspective, the impact is that all trustees, whether UK or foreign, need to urgently consider their status under FATCA . regardless of whether they have any US connection. We set out below a brief outline of FATCA and its implications for trustees.

Please note that the following is only a brief summary and should not be relied upon in isolation. If you are in any doubt about your status or your obligations under FATCA then please seek professional advice.

How is FATCA enforced?

FATCA is being introduced globally by IGAs that the US is negotiating with individual governments. The UK and US signed their IGA on 12 September 2012. Under the terms of the agreement, all UK FIs have a reporting obligation to HMRC, unless they satisfy one of a number of exemptions.

Are you a UK FI?

The wide definition of Financial Institution for the purposes of FATCA may include:

Professional trustees (other than individuals)
Trusts
Family offices
Nominees (other than individuals).
Determining whether or not you are a FI is the first step in determining whether or not you need to comply with any reporting obligations under FATCA.

Professional trustees

Trustees may be FIs if they are .entities. and .in business.. Individuals acting as trustees are not .entities., even if acting in a professional capacity, and therefore will not be FIs. However, the trust itself could be. An individual trustee will therefore have no reporting obligations under FATCA, but he or she may need to report on behalf of the trust (see below).

Professional trustees that are entities will be FIs if they are .in business. as trustees and will therefore have reporting obligations under FATCA.

Trusts

For FATCA purposes, a trust is considered to be a separate entity from its trustees and is deemed to be a FI, and more specifically an .investment entity., if:

More than 50% of the trust’s income is attributable to investing, reinvesting or trading in financial assets (generally stocks, shares, financial instruments etc), AND
Either the trust, or its assets, are professionally managed by a FI, for example a professional trust company or discretionary investment manager.
It is possible that a trust which is not an investment entity may fall within one of the other FI categories depending on its structure and activities. However, it is probable that many trusts will fall within the investment entity category.

Family offices

A family office will be a FI where it assists in the management or administration of financial assets on behalf of others.

Nominees

An entity will be a FI where it is in the business of acting as a nominee for others.

Non-UK FIs

FIs outside the UK will need to refer to the IGA that applies to them and comply with its requirements accordingly.

Are you a non-reporting UK FI?

If the trust is a charitable trust then it is a .deemed compliant Financial Institution. and, therefore, a non-reporting UK FI. A qualifying charity is one that is registered as a charity with the Charity Commission of England and Wales or the Office of the Scottish Charity Regulator.

Generally, a non-reporting FI will not need to carry out the due diligence and reporting obligations as set out in the UK-US IGA.

Are you a reporting UK FI?

If the trust is a UK FI and is not a charitable trust, then it will be a .reporting FI..

Are you a non-financial foreign entity?

If a trust is not a FI then it will be a non-financial foreign entity (NFFE). In this case, it must be determined whether the trust is an .active. NFFE (broadly one that is carrying out a trading business) or a .passive. NFFE under the provisions of the agreement.

There are no HMRC reporting requirements for a NFFE, but a passive NFFE must be able to identify whether it has any US owners and report these to any FIs to which it has a relationship, eg the trustees. bank.

Registration

FIs must register and obtain a global intermediary identification number (GIIN) from the IRS by 25 October 2014 at the very latest. It would not be sensible, however, to leave registration that late. Failure to register results in a 30% withholding tax being levied on transactions with a US connection.

Reporting to HMRC

Reporting UK FIs must provide information to HMRC on any US account holders on an annual basis. However, the format that the necessary reporting will take and the means of transmission are still to be finalised. If there are no US account holders, a nil return must be filed.

Next steps

To find out how BDO can help you to ensure that you are FATCA compliant please speak to your usual BDO contact or the BDO trusts and FATCA specialists listed overleaf.