Trustees: assume nothing and monitor developments

The press has been writing about the US FATCA (Foreign Account Tax Compliance Act) and the effect on UK trusts. I suspect that many trustees believe that because their trusts lack US connections, FATCA does not apply to them.

Unfortunately, this is incorrect and all UK trusts need to consider their position and whether it applies. And, even if a trust does not need to register or report, it will still need to provide certification to banks, fund managers and insurance companies that it lacks US connections in order to confirm its status.

The penalty for failure to register
or provide certification is substantial: a
30 per cent withholding tax applied against payments to the trust by the financial institutions holding the trust’s investments. The tax will be withheld regardless of whether there are any US connections with the trust.

The regulations only apply to
UK tax resident trusts; charitable
trusts are excluded. Trusts are included
in the definition of a foreign entity
in the FATCA, and under the Act
they are considered to be either
a financial institution or a non-financial foreign entity.

If a trust is considered a financial institution then registration with the IRS is required, even if there are no US connections, and also annual reporting to HMRC (which will be a nil return if there are no US connections). Trusts likely to be caught and considered a financial institution are those with corporate trustees and those that engage another entity, such as a discretionary fund manager, to manage the trust and/or
its assets.

In certain circumstances it may be that a trustee must register (for example, in some cases where there is a corporate trustee). In other cases, where the trust
has a responsibility to register it may be
able to engage a third party to report
on its behalf.

Any trust that is not a financial institution will be a non-financial foreign entity. These trusts will not be required to register or report, but will need to provide the certification mentioned above to not be subjected to the 30 per cent withholding tax.

The deadline for registration with the IRS is 25 October 2014 while reports required in respect of 2014 are due to be submitted to HMRC by 31 March 2015. STEP, the Law Society and the ICAEW have issued guidance and a helpful flow chart that can help trustees consider whether they should register.

In addition to the above, the European parliament has voted in amendments to anti-money laundering legislation which will have significant impact on UK trusts. One of the proposed amendments includes a requirement for a public register
of all trusts within the EU.

The register will require the
names of settlors, trustees and the
ultimate beneficiaries of trusts. The
UK government has opposed the move.

However, not many other countries
(if any) in the EU use trusts in the
way we do, and therefore it may
be that no changes can be made.

The vote made in February means that the legislation as it stands can be built on by the next European parliament – once it has been elected at the end of May – but cannot be undone. Therefore, trusts will need to watch the progress of the legislation once the new European parliament is in place as this could have a significant impact on trusts going forward.

Clearly, there is considerable change under way in the world of trusts, coming from a number of different directions. Trustees need to keep a close eye on developments, and certainly avoid the assumption that they are unaffected.

Lucy Brennan is a partner at Saffery Champness

She writes a regular blog on tax and estate planning for Private Client Adviser