Trusts, Wills & Estates

FATCA and UK resident trusts

All trustees of UK resident trusts should consider their position with regard to FATCA and take appropriate action. In this article we look at the background to this new compliance obligation, outline what trustees need to consider and the action that should be taken. The law stated is at April 2014 but please note that this is an area which is currently evolving. This is a broad statement of the current guidance and you should seek advice as to the present position and your own obligations.

What is FATCA?

FATCA is the acronym for a US statute, the Foreign Account Tax Compliance Act which became part of US law in March 2010. The Act is intended to deal with tax evasion by US citizens with assets held outside of the US. According to the Internal Revenue Service (IRS), the US equivalent of HMRC, “the objective of FATCA is the reporting of foreign financial assets.”

How does it affect UK resident trusts?

In September 2012 discussions between the UK and US Governments regarding the implementation of FATCA were formalised in the ‘UK-US Agreement to Improve International Tax Compliance and to Implement FATCA’.

The practical effect of FATCA and the Intergovernmental Agreement (IGA) is that, unless the registration and reporting requirements of FATCA are complied with, then US source income or proceeds of capital will be subject to a withholding tax of 30% in respect of payments made on or after 1st July 2014. In this era of multi-national investment many UK trusts will have US source income and will suffer the withholding tax if the trust is required to register and report and takes no action. For example, the recent sale by Vodafone of its stake in Verizon will result in many trusts acquiring US shares for the first time. Consequently, all trustees of UK resident trusts should consider their position with regard to FATCA.

Are all UK resident trusts required to register under FATCA?

No, for example, charitable trusts do not need to register. The IGA basically puts UK resident trusts into one of two categories. A trust is either a Financial Institution or a Non-Financial Foreign Entity. The Society of Trust and Estate Practitioners has produced a useful flow chart to help trustees decide into which category they fall, but in very broad terms a family trust will be categorised as a Financial Institution if its investments are managed on a discretionary basis by brokers or fund managers. If the trust manages its own investments then the trust is likely to be a Non-Financial Foreign Entity which does not need to register or report. However, it will be reported on by any Financial Institutions that it uses and will have to determine whether it is an “active” or “passive” NFFE (as defined by the legislation).

If the trust is a Financial Institution then the position then depends on whether or not it has a corporate trustee (such as Clarke Willmott Trust Corporation Limited). If it does, then the trust itself does not have to register or report but the corporate trustee must do so.

If the trust does not have a corporate trustee then it is required to register and report. This can either be done directly or via several third party routes. If the second option is chosen the third party will fulfil the trust’s reporting requirements, although the responsibility still remains on the trustee to ensure that the third party has complied with all obligations. In the case of a typical family trust with investments managed on a discretionary basis, for example, the trustees might consider appointing its fund manger to comply with the FATCA requirements.

If the trustees decide to register and report directly then registration can be done electronically via the IRS website.

Key dates

5 May 2014: Deadline for registration in order to appear on the first list (extended from 25 April 2014).
2 June 2014: Date that the IRS will post the first list of Financial Institutions that have registered with it.
1 July 2014: All withholdable payments made on or after this date will have 30% withholding tax applied unless registration has taken place.
25 October 2014: All trusts required to register must to do so by this date in order to meet the final date for being on the IRS list.
1 January 2015: Final deadline for being on the IRS list of Financial Institutions.
31 May 2015: Deadline for first reports.