Skip to main content

The Foreign Account Tax Compliance Act & UK Trusts

The Foreign Account Compliance Act (FATCA) is recent US legislation designed to mitigate tax evasion by US citizens who hold assets outside the US.

The Foreign Account Compliance Act (FATCA) is recent US legislation designed to mitigate tax evasion by US citizens who hold assets outside the US.

The US and UK governments have signed a Treaty, FATCA IGA (Foreign Account Tax Compliance Act Inter Governmental Agreement) to implement FATCA within the UK.

The Treaty requires financial institutions which include many trusts to comply with the new legislation. Failure to comply may result in a 30% withholding tax being imposed on US source income and any proceeds of US capital transactions of any financial institution.

The legislation therefore places a requirement on many trustees outside the US to notify details relating to the trust to the US Internal Revenue Service (IRS).

The upshot of the Treaty is that all UK resident trusts and trustees need to review their status under the Treaty and (if required to do so) register with the IRS by 25 October 2014. In practice trustees can register any time up to 31 December 2014 without the risk of incurring a penalty. Penalties may also be levied for non-compliance including failure to register or report information and/or providing incorrect information.

It is also likely that trustees will be asked to confirm their FACTA status as part of the usual client identification and money laundering procedures when dealing with financial institutions.

It is a misconception to believe that nothing needs to be done and that the FATCA legislation does not apply because the trustees are British, the trust has no US connections, assets or income or has a low asset value.

There has been some guidance issued jointly by STEP (Society of Trust and Estate Practitioners), Law Society and the Institute of Accountants England & Wales (ICAEW) and separately by HM Revenue & Customs (HMRC). This guidance advises that all UK resident trusts with the exception of charitable trusts may have a legal obligation to register with the IRS with a possible annual reporting requirement to HMRC by the trustees themselves, by a corporate trustee or via an investment fund manager which manages the trust’s investments on a discretionary basis.

It is important to note that regardless of how the reporting requirement is met the responsibility falls upon the trustees.

Under FATCA all trusts are deemed to be entities. Trusts are therefore either Investment Entities which is a type of Financial Institution (FI) or Non Financial (Foreign) Entities (NFFE). The type of entity is mainly decided by who manages the trust.

Trustees of trusts that are NFFEs do not need to register or report themselves as they will be reported on by any FIs they use above a certain threshold.

The types of trust required to register under FATCA are those trusts which are classified as FIs.  This is applicable where the trust’s assets are managed by a fund manager on a discretionary basis and the trust’s gross investment income equals or exceeds 50% of its gross income and/or where the trust has a corporate trustee.

FATCA therefore affects:

  • Any person who acts as a trustee
  • Any firm which is a Financial Institution (FI)
  • Any lawyer or accountant who has clients in these categories.

Accordingly, all trusts now need to be reviewed and classified to ascertain if there is a reporting requirement under FATCA. Some trusts will have no reporting requirement, for example where the principal asset of the trust is a family home. However, many other trusts will be caught by the new legislation.

The classification of trusts under FATCA should also include a review of engagement letters, new client procedures and any appropriate reporting to HMRC.