FATCA: How American anti-avoidance laws impacts on UK trusts

October 29, 2014

As a result of co-operation between the UK and US tax authorities, HM Revenue & Customs (HMRC) and the Internal Revenue Service (IRS) respectively, the Foreign Account Tax Compliance Act (FATCA) is now a part of UK law and impacts on almost every single trust in the UK, even those which have no US connection. It is therefore imperative that trustees, regardless of the size of the trust or the nationalities of those involved, obtain advice as to the implications of this legislation.

FATCA is an anti-avoidance measure introduced in the USA and its primary purpose is to ensure that US citizens are fully disclosing their entire worldwide income to the IRS. Whilst it would be logical therefore to assume that the only trusts to be affected by this legislation are those with US citizens, unfortunately this is not the case. Under the new rules, all UK trustees must consider the status of their UK trust under FATCA, with certain exemptions such as charitable trusts, and this will determine whether there is a requirement to register the trust with the IRS.

Broadly, the first consideration for UK trustees is whether their trust is classified as a Financial Institution (FI). The definition of a FI under the FATCA rules includes professional trustees, trusts, family offices and nominees. Whilst individuals acting as trustees are not FI’s under the legislation, the trust itself could be classified as an FI if more than 50% of the trust income is attributable to investing, reinvesting or trading in financial assets and these assets are professional managed by a trust company or discretionary investment manager.

In reality this means that a trust with over half of its assets in an investment portfolio of stocks and shares managed on a discretionary basis with a stockbroker or similar investment company will be treated as an FI under FATCA. As a result, a large number of trusts will immediately fall within this definition of a FI.

What follows next is a due diligence process to be completed by the trustees to ensure they can meet the reporting obligations to HMRC who will then pass the information back to the IRS. Alternatively, the trust may establish it does not need to report to HMRC and can complete a self certification. This process involves establishing the identity of trustees, beneficiaries and settlors.

Once it is established that the FI’s must report to the IRS, a registration process has to be completed before 1 January 2015 and a global intermediary identification number (GIIN) obtained from the IRS to ensure they will appear on the published list of FI’s by that deadline.

The consequence of a failure to act is a severe one. All transactions with a US connection will be subjected to 30% withholding tax and trustees may find that banks may not operate trust accounts until the FATCA status is confirmed. Trustees can leave themselves open to actions by beneficiaries for failing to comply with their responsibilities as a trustee.

This can seem a daunting and complex process for trustees however Cleaver Fulton Rankin’s own corporate trustee company, Cleaver Fulton Rankin Trustees Limited, has obtained it’s own GIIN and is ready and able to assist our trustee clients to ensure they meet the requirements for certification  and registration.

Please note; the content of this article is for information purposes only and further advice should be sought from a professional legal advisor before any action is taken.

Please contact Cleaver Fulton Rankin on 028 9024 3141 or alternatively www.cfrlaw.co.uk