The FATCA eagle is hovering over us

FATCA is the Foreign Account Tax Compliance Act. It is a US federal statute aimed at rooting out tax evasion by US individuals by placing reporting obligations on foreign financial institutions (FFIs) who MAY provide benefits to US citizens. As is well known, the US taxes its citizens on income received from anywhere in the world. If a FFI fails to disclose relevant information to the US Internal Revenue Service, it will face a 30% withholding tax on any US sourced income received by it.

Can US tax legislation affect a Scottish Trust?
On 1 September 2013 the International Tax Compliance (United States of America) Regulations 2013 (“the Regulations”) came into force in the UK. The Regulations implement an agreement between the governments of the UK and the USA. These Regulations apply to what are termed “reporting financial institutions” (RFIs). One type of RFI is an “investment entity”, and it is likely that many family trusts holding portfolios of quoted investments are caught by the definition of investment entity and are therefore RFIs. All Trusts are potentially affected by FATCA, even if neither the settlor nor any of the beneficiaries has any US connection. It is ESSENTIAL that all Trustees take steps NOW to determine their FATCA status, as in future any other financial institution with which the Trust deals will require the Trust to disclose its FATCA status. That status will be either a Foreign Institution (FI) or a Non-Financial Foreign Entity (NFFE). A FI may need to register with the US IRS (for some obscure reason this depends on the nature of the investments and how they are “managed”) but a NFFE will be exempt from registration (but not from making a determination).

What determines that the Trust is a RFI?
Guidance has been issued but it is ambiguous and contradictory. If the Trustees are individuals and the only asset is a house or a holiday cottage, it is undoubtedly a NFFE. If the Trustees hold only an investment portfolio managed by Brokers with discretion, it is a RFI. In my opinion there is a grey area surrounding Trusts with portfolios managed on an advisory basis, especially where the Brokers carry out some investment related functions such as collection of income. HMRC express the view that Trusts with “execution – only” portfolios do not need to register, but if you look at the purpose of the legislation, there is no logic in that.

The registration process
I take the view that there is no downside in registering as a RFI. This is done online, and the Trust obtains a “Global Intermediary Identification Number”. It will then report relevant transactions to HMRC in the UK. There are penalties for failure to comply with the Regulations.

The deadline for registration was 25 October 2014
Themis 2662The burden imposed by registration will be slight if the Trust has no US connections, and I imagine that most Returns will be “Nil”. The work involved on an ongoing basis in the vast majority of cases will be just another box to be ticked on the UK Trust Tax Return.

But my trust has a Trustee Company (TC) as one of its Trustees
Good news! The TC MUST register as a RFI, and its registration covers your Trust. The TC has all the reporting obligations for the Trust. (Bad news — this will increase the TC’s administration costs!) Allan Nicolson 9th October 2014 (updated 31st October 2014)