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FATCA and UK Trusts

2nd September 2014

The Foreign Account Tax Compliance provisions, commonly known as FATCA, are part of the legislation introduced in the United States in 2010 to ensure that its citizens are fully compliant in disclosing their worldwide income to the Internal Revenue Service (IRS).  It has spawned a number of international agreements with other countries.  On 12 September 2012 the UK and the US signed a Treaty known as the UK/USA Intergovernmental Agreement (IGA), which came in to law in the UK law through s222 Finance Act 2013.

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The effect of the legislation is to place an obligation on Financial Institutions to both register with the IRS for a Global Intermediaries Identification Number (GIIN), and to make appropriate reports to HMRC.  The major impact will fall on banks and investment managers, but there is also an obligation that will fall upon UK Resident Trusts to determine their reporting requirements.  All UK Resident Trusts (with the exception of charitable trusts which are at present exempt) are caught by FATCA irrespective of whether or not they have any US persons as settlors, trustees or beneficiaries, or any US assets. 

The extent of registration depends on whether a trust qualifies as an Investment Entity, and therefore by extension a Financial Institution.  A Trust will qualify as an Investment Entity if the Trust’s gross income from investments which are managed by a Financial Institution exceed 50% of the total gross income of the Trust.

UK Guidance suggests that where Trustees have appointed a discretionary fund manager to manage their investment portfolio, this fund manager is considered a Financial Institution.  Should the income derived from the portfolio constitute more than 50% of the total income generated by the Trust, the Trust itself is also to be considered a UK Financial Institution, with the accompanying obligations that this imposes on them.  Should the Trust have only cash and/or property, or if it has its investments with a manager on a purely advisory basis, it is likely to be considered a Non-Financial Foreign Entity, and will not need to report.

Where a UK Resident Trust is deemed to be a Financial Institution as per the above rules, it will be required to report to the US authorities.  There are a number of routes open to the Trustees:

  1. The Trust may register directly with the IRS.  The Trust will be required to perform due diligence on its trustees, settlor and beneficiaries, and submit an annual FATCA tax return to HMRC. This is likely to be a significant burden on trustees.
  2. Should the Trust have a Trustee who is a registered reporting Financial Institution, such as a Corporate Trustee, the Corporate Trustee would be required to register with the IRS and perform this due diligence.  The Trust itself will be treated as a Non-Reporting UK Financial Institution and will not need to register directly with the IRS.
  3. The Trust may “Owner Document” to the Investment Manager.  This takes the form of certifying to the Investment Manager that the Trust has no US resident individuals as settlor, trustee or beneficiary, and providing suitable money laundering documentation to the investment manager in support of those claims.
  4. The trust may become a “Sponsored Investment Entity”.  The sponsor will assume all reporting responsibilities on behalf of the Trust.

It is our opinion that for a UK resident trust with no US connections, the simplest route available to the trustees is likely to be the owner documented route.  The trustees should speak with any Investment Manager to ensure that the appropriate information is made available to the Investment Manager to enable this route to be adopted.

Contact Nigel Landsman for further details and assistance.

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