12 March 2014

FATCA update for UK trustees

Richard Cassell
Of counsel | UK

Many UK advisors believe that FATCA only applies to UK trusts if there are US beneficiaries, settlors, or investments. This is not true. FATCA will apply to all financial institutions (banks, brokerage firms, trust companies and all financial accounts) in the UK and will require all financial institutions to file reports. Currently, if there is no US beneficiary or “owner” of a trust then the report should be a pro-forma zero report. Nevertheless, due diligence is required under the UK Regulations and Guidance issued by HMRC before such a report can be signed. These requirements will need to be met before 31 December 2014 and in practice trustees may be required to comply by banks and financial institutions from the middle of this year.

  1. *Steps that UK trustees will need to take

*Under the US-UK Intergovernmental Agreement (“IGA”), UK trusts with financial accounts will likely be treated as foreign financial institutions (known as “FFIs”). If the trust has a corporate trustee, that corporate trustee will almost certainly, itself, be an FFI and therefore will be required to register with the US Internal Revenue Service (“IRS”) and obtain a global intermediary identification number (“GIIN”). Using that GIIN the trust corporation will then be required to file an annual FATCA report with HMRC with information about US beneficial ownership. Trusts administered by the trust company, will without any separate trust registration, be treated as trustee documented trusts. This will mean that the trust company will need to file reports with respect to each trust: no separate registration with the IRS will be required in relation to the individual trusts. However, if a trust has only individual trustees and that trust holds an investment portfolio then a registration will need to be made on behalf of the trust to obtain a separate GIIN and file a separate HMRC-FATCA report.

  1. *Trusts that do not need to report

*Broadly, all trusts with individual trustees that have investment portfolios will be treated as investment entities, and therefore FFIs, since they will be investing, administering or managing funds on behalf of other persons (the beneficiaries) if 50% of the trust income is attributable to such activity. Therefore, a trust with substantial trading income, for example, may not be an investment entity but most trusts will qualify as such. Trusts which only hold land, maybe with a small cash account or an execution only securities account, will not be treated as investment entities and will therefore be treated as non-financial foreign entities (“NFFEs”) and if they are passive NFFEs will still have reporting requirements with respect to any financial account.

  1. *What needs to be reported

*Although the forms have yet to be published by HMRC we expect that each trust, or trust company, with respect to each trust, will need to file an annual FATCA report, detailing any US beneficiaries. If the trusts are discretionary trusts then we anticipate that only the amount of the distribution will need to be reported with respect to each US beneficiary. If the beneficiary has a fixed income or remainder interest, then the amount of fixed distributions (regardless of whether actually distributed), the value of the remainder interest and the account balances associated with such interest will need to be reported. If the trust has no US beneficiaries and no US controlling persons then the trustee should only need to file a “zero” return. However, in order to do so the trustee will need to undertake due diligence procedures set out in the guidelines in order to satisfy itself that the beneficiaries are not US persons. 

  1. *Controlling persons

*The IGA includes reporting with respect to any US controlling persons. This includes settlors, certain beneficiaries and protectors whether or not beneficiaries. This area is still under review by HMRC. However, currently the position seems that account balances within a trust will need to be reported with respect to any US protector.

Richard Cassell Of counsel | London

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