Key questions to ask yourself

What are the potential obligations under the UK/US intergovernmental agreement which implements a financial reporting regime in response to the US-Foreign Account Tax Compliance Act (FATCA) rules? Here is a simplified summary of key questions.

FATCA is only the first of many agreements that will come into place over the next few years. UK resident trusts that are deemed ‘reporting financial institutions’ for FATCA purposes will need to report information to HMRC using the UK rules governed by the UK/US IGA. Trustees of UK resident trusts will need to determine if they are reporting financial institutions for this purpose and keep up to date records on all persons connected with trusts and other entities. Those persons include: living settlors, trustees, appointors, protectors and beneficiaries who are in receipt of distributions. Even if they are not reporting institutions they will need this information to verify their status to other financial institutions that they may deal with.

In particular, they will need to identify and record those who are foreign citizens, domiciled, residents, have rights of residence or taxpayers. This information will need to be shared with any banks, investment advisers and anyone with whom they transact business.

Many people do not realise that they may be foreign taxpayers by virtue of citizenship or residence. Trustees will therefore need to be alert to any signs of foreign place of birth, available address and foreign bank accounts.

Is the trust resident in the UK for tax purposes? If ‘yes’ it is covered by the UK/US IGA. If ‘no’, it will either be subject to the IGA between the US and the country of residence or the US FATCA rules directly.

We have encountered a number of instances where investment managers have sent standard FATCA letters to us as tax advisers to the UK resident beneficiaries of trusts that are resident outside the UK.

What type of trust is it?

Charitable trusts and most pension funds are exempt from registration and reporting. Some unapproved arrangements such as Funded Unapproved Retirement Benefits Scheme (FURBS) are treated as trusts and may be required to report.

Who are the trustees?

If at least one of the trustees is a UK resident company, the corporate trustee will be required to register with the (Internal Revenue Service) IRS as a sponsoring entity and provide a consolidated report on all of its appointments to HMRC . Individual trusts that have at least one corporate trustee do not need to register. If the trust has two corporate trustees, both will have to report on the same trust.

If all of the trustees are individuals, the assets will determine which action needs to be taken to comply with FATCA. Do the assets of the trust include a portfolio of financial investments that are professionally managed? If professional managers are employed to manage a portfolio of financial assets (stocks, shares etc.) The trust is regarded as a Foreign Financial Institution (FFI).

Is the trust regarded as a custodian institution? Some trusts such as employee benefit trusts, which continue to hold company shares for an employee after they have been granted could be regarded as FFIs.

How many connected persons (living settlors, trustees, appointors, protectors and beneficiaries in receipt of distributions) are there?

If there are twenty or more connected persons of a trust that is a UK financial institution, the trustees will be required to register the trust with the IRS and obtain a Global Intermediaries’ Identification Number (GIIN). They will be required to file an annual report with HMRC.

If there are fewer than twenty connected persons in such a trust, the trustees may be able to rely on the owner documented reporting option. Most leading investment managers are offering this option to their clients. However, this option may not be available if the trustees employ more than one investment manager.

Under ‘owner documentation’, reporting is carried out on a consolidated basis by the investment manager, who must report on all accounts with connected persons who are US taxpayers. The trustees themselves are not required to register with the IRS. They must provide the investment manager with details of all connected persons with US taxpayer status and agree to notify the manager of all changes in status within thirty days.

Important information

This guidance should be read with and is no substitute for the guidance that has been published either by HMRC or jointly by the Law Society, Society of Trust and Estate Practitioners (STEP) and the Institute of Chartered Accountants in England and Wales (ICAEW).