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Once upon a time it was reasonable to assume that if your trust had no US connections - so no US settlor, beneficiaries or assets – then you didn’t need to concern yourself with US Internal Revenue Service (IRS). But from 1 July life is no longer that simple. The UK Government has enacted legislation to bring US anti-avoidance rules into play here in the UK.
Here are the five things anyone involved with trusts needs to know – regardless of whether or not anyone connected with the trust has even set foot on US soil.
1. What does FATCA stand for?
FATCA stands for the Foreign Account Tax Compliance Act. It is part of a US drive to tackle tax avoidance. Concerned that US taxpayers may be evading tax by using foreign accounts the US has enacted legislation to require non-US financial institutions to report information on payments made to US citizens to the IRS. If foreign institutions do not comply, withholding taxes will be applied.
In 2012 the UK government entered into an agreement with the US to help manage the difficulties our financial institutions would encounter in complying with FATCA. It provides a route through which financial institutions can comply with their obligations by reporting to HMRC the necessary information. This is now part of UK law. It is so broad that it catches not just banks and financial institutions, but also trusts.
You need to be aware that the US is unique in imposing its taxes based on citizenship, not residency. Therefore US citizens living outside the US – even if they have no US income or assets- are still required to report their earnings to the IRS and count as US taxpayers.
2. Who does this affect?
The new rules will affect all UK-resident trusts – even if they have absolutely no US connections. All UK trusts will need to determine what their status is under FATCA. In future trusts will be asked their status by the UK financial institutions they will deal with, e.g. when opening bank accounts or investment portfolios.
Trustees will also need to monitor if they acquire any US connections – for example if a beneficiary moves to the US, or marries a US citizen. The children of such a marriage could well inherit US citizenship from the US parent.
3. What is the status of our trust under FATCA?
A trust can be either a Foreign Institution (FI) or a Non-Financial Foreign Entity (NFFE). A NFFE does not need to report under FATCA. An FI may, depending on the assets it has and how it is managed.
The major professional bodies in the area - the Society of Trust and Estate Practitioners, the Institute of Chartered Accountants and the Law Society have all got together to produce a flow chart and guidance to help trustees identify which of the two categories they might fall under. This guidance is currently being updated following a further statement on FATCA on the 27 June.
As a very basic example, a trust with two non-professional trustees holding a cottage in the Lake District should generally be NFFE. However a trust with a professionally managed investment portfolio might expect to be a FI and will probably need to report.
4. Our trust is an FI, what next?
If a trust is an FI, then it first needs to register for a GIIN or Global Intermediaries Identification Number with the IRS. Future annual reporting can be made directly to HMRC by the trust or another entity (such as a corporate trustee) can take on the reporting requirements for the trust.
5. What is the timescale?
As far as we know at present the practical deadline for registration as an FI is the 25 October 2014 with the first reports due to be submitted for 2014 by 31 May 2015.
Registration as an FI is done online with the IRS. The method of annual reporting thereafter has not yet been confirmed.
Once we have updated guidance from the professional bodies we will be contacting our trust clients to advise them of their responsibilities.
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