The Foreign Account Tax Compliance Act (FATCA) and Trusts

What is FATCA?

In 2012 the UK and the US signed a treaty to implement FATCA in the UK.  Although FATCA has been around for a number of years, you may never have heard of it or if you have you may think it is not relevant to you, but you could be wrong.

The aim of FATCA is to reduce tax evasion by US citizens by imposing obligations on Financial Institutions to report payments made to US citizens to the Internal Revenue Services (IRS).  In the UK this is done via HM Revenue & Customs under the Model 1 Inter-Governmental Agreement (IGA).

What has this got to do with UK Trusts?

The relevance to UK Trusts comes from the FATCA definition of a Financial Institution.  There are different types of Financial Institutions defined under FATCA but this article will focus only on Investment Entities and its relevance to UK trusts.

If a trust is an Investment Entity then it is required to register with the IRS and obtain a Global Intermediary Identification Number (GIIN) regardless of whether it has any connections to the US or US persons. 

Which Trusts are Investment Entities?

An Investment Entity is one that meets the financial assets test (see below) and is managed by a Financial Institution.  With regards to trusts the test of being managed by a Financial Institution will be met where the Trust or its activities are being “professionally managed”.  This would typically be where either one of the trustees is a Financial Institution or the trustees have appointed a discretionary fund manager to manage the trust’s assets.

A trust will meet the financial assets test if its gross income is primarily from investing, reinvesting or trading in financial assets.

Therefore, the most common example will be when a trust holds a portfolio of investments, from where the majority of its income is derived, which is managed by a fund manager on a discretionary basis (i.e. the fund manager manages the investment strategy of the assets).  In this scenario the Trust will be classed as an Investment Entity and be required to register with the IRS under FATCA.

Are all Trusts that have Investment Portfolios classed as Investment Entities?

No. The simple holding or acquisition of a retail type product does not make the trust a financial institution, nor does instructing a Financial Institution to acquire or dispose of financial assets on the trustees’ behalf.

Where the assets being managed are in a pool used to fund the product purchased, the mere purchase of that product (e.g. an insurance policy, investment bond or unit trust) will not constitute professional management of the assets of the trust.  Although the underlying investments within that product are being managed, the product that the trust holds is not professionally managed and therefore it will not meet the condition.

Are there any exemptions?

Charities, community amateur sports clubs and registered pension schemes do not normally need to register.

How do I register?

You can register the Trust on the IRS FATCA website and with HMRC through the Trust’s Government Gateway account.  We are able to undertake the registration process on your behalf if preferred.

Reporting

In most cases it is unlikely the trust will need to report anything but the requirement to register remains.  If the trust’s beneficiaries, trustees or other controlling persons include US citizens then a FATCA return may be required to submitted by 31 May each year.  What you are required to report and how you do this is beyond the scope of this article, but if you require further guidance in this area please contact us.

Practical Implications

As an example, when a trust opens a bank account or other financial product it will be required to confirm its FATCA status to the bank before the account can be opened.  If the Trust is an Investment Entity it will need to confirm to the bank that it is a Financial Institution and provide the GIIN.

If the trust is not a Financial Institution it will be classed as a Non-Financial Foreign Entity (NFFE) and will have to declare this to the bank instead.  There are two types of NFFE, active and passive, and again these have specific definitions.

In summary

This article only scrapes the surface of what can be a complex area of tax compliance and the main purpose of it is to make trustees aware of their potential obligations under FATCA. 

We recommend seeking professional advice if you are unsure of your obligations as a trustee. 

FATCA is a relatively unknown field to both accountants and solicitors.  At Streets we have been dealing with FATCA registrations and related queries and compliance for our clients for a number of years, gaining valuable experience along the way.

If you are interested in engaging our services to assist you in matters relating to FATCA please do not hesitate to contact our tax manager, Mark Poplett on 01522 551200.