UK trusts with US connections – new reporting requirements
The US introduced a number of measures in the Foreign Account Tax Compliance Act, commonly known as 'FATCA', to tackle the use of offshore accounts by US taxpayers to evade US tax.
The US has entered into tax agreements with various countries including the UK in order to implement it.
FATCA, which comes into effect from January 2014, imposes reporting requirements on a wide range of Foreign (i.e. non-US) Financial Institutions such as banks and certain non-financial foreign entities and may have unexpected consequences for UK trusts with even tenuous US connections going forward.
Certain trusts will have to report certain US beneficiaries (broadly thought to be absolute beneficial owners, life tenants, and discretionary beneficiaries who have received a distribution from the trust and who are either US citizens or green card holders) to the US Internal Revenue Service (“IRS”) either directly or through HMRC and to cease dealing with them if the IRS so requests. Any trust that fails to comply will see a 30% withholding tax being applied to income from its US investments from 1st July 2014.
It was initially hoped that many family trusts would be exempt from reporting under FATCA but recently issued guidance from HMRC suggests that the net is wider than originally envisaged: UK trusts (which do not have a corporate trustee) which hold any financial investments (other than a simple bank account) managed by a third party financial institution will be classed as an “investment entity” and will have to register for FATCA reporting (unless another financial institution can report for them). This will affect the many trusts which delegate responsibility for managing investments to a commercial fund manager. Where a UK trust has a corporate trustee, that trustee does need to register for FATCA reporting and report on the trusts of which it acts as a trustee, although the trust itself does not report.
Trusts which neither have a corporate trustee nor delegate investment decisions should not need to register or make FATCA reports. However, those trusts may still be affected in that they will be need to identify whether a US settlor, beneficiary, trustee protector, or anyone else is exercising ultimate effective control over the trust (so that they are a substantial US owner or US controlling person) and report them to any financial institutions they come into contact with who do have reporting obligations under FATCA.
Trustees should therefore review their beneficiaries and investments and if there is a US connection, seek advice as soon as possible.