Confusion over Fatca deadline for trusts
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Trustees of private family trusts are being urged to register with the US tax authority by next week or risk non-compliance with new counter-tax avoidance legislation.
The US Foreign Account Tax Compliance Act, which is intended to detect tax evasion by US citizens who use overseas accounts, imposes demands on wealth managers worldwide, irrespective of whether they have any US beneficiaries or investments.
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Investment-based trusts that are managed by a discretionary fund manager are considered, according to the US tax authority’s definitions, to be “financial institutions” and must therefore meet Fatca requirements. The first step is to apply for a so-called “global intermediary identification number” or Giin.
Failure to meet Fatca’s reporting obligations could result in a 30 per cent withholding tax on income on behalf of the IRS – although experts offer differing interpretations of what trustees must do and by when.
“Even if there is no connection with the US, if a trust has investments managed by a fund manager or broker, it needs to be registered,” said Carol Cummins, private client consultant at solicitors Clarke Willmott.
Trusts that hold non-financial assets – such as property – or investments that are not professionally managed, should not need to register or report unless there are US beneficiaries or income. Charitable trusts are also excluded.
The Law Society, accountancy body ICAEW and the Society of Trust and Estate Practitioners have recommended that relevant trustees register with the US Internal Revenue Service for a Giin by October 25. This should ensure they meet the deadline for overall compliance of January 1 2015.
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Sue Moore, technical manager for private client at ICAEW, said that this recommended deadline allows sufficient leeway for any delays by the IRS ahead of the new year deadline. “You’ve got to be cautious . . . It’s like planning to get to the station ten minutes before your train arrives.”
Some wealth managers are sceptical about the need for trustees to register with the IRS this month, however.
Jason Collins, partner at Pinsent Masons, said that October 25 is not a deadline his company recognises. Mr Collins said that UK resident trusts that qualify as reporting financial institutions have until the end of 2014, because Giin numbers only come into effect after January 1. There should be plenty of time to register before reporting starts officially in June 2015, Mr Collins added.
“A lot of people are panicking and registering when they don’t need to,” agreed Keith Parkhouse, trust manager at solicitors Pemberton Greenish.
Private family trusts that hold investments will not necessarily have to register at all, Mr Parkhouse said, where it is a “trustee documented trust”. This is where a trustee – typically a corporate entity – is a financial institution and needs to register for Fatca itself.
Where a family trust has engaged an investment manager on a discretionary mandate, as is common, Mr Parkhouse said that registration with the IRS can be avoided if the manager is accepted as an “owner documented financial institution”. This means that it agrees to disclose relevant information about the trust to HM Revenue & Customs, which may then pass it on to the IRS.
“The IRS does not want tens of thousands of UK family trusts with no connections to the US to register [for Fatca] . . . and is therefore promoting alternatives.”
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Mr Parkhouse said that his firm – like many others – has adopted a cautious approach towards signing up its clients’ trusts with the IRS. “It may be irrational, but our feeling is that the US has a reputation for being a draconian and unforgiving jurisdiction. Our concern is that if we register with them, [our reporting obligations] will never come to an end.”
Ms Cummins said that while a lot of professionals are nervous about registering with the IRS, she is relatively unconcerned for her clients. “We think that because reporting is done through HMRC and not the IRS – apart from obtaining the Giin number – everything should be relatively straightforward.”
When it comes to declaring information in 2015, Ms Cummins said that the “vast majority” of trusts will have no US-related liabilities, and will therefore simply submit nil returns.
Ms Cummins said that any trustee who is unsure if they need to register for Fatca reporting should contact a professional, preferably one who is a member of the international Society of Trust and Estate Practitioners.
What is Fatca?
Fatca legislation has already had a big impact on wealth managers in the UK.
Since July, they have been compelled to verify the tax residency of clients who open new accounts. Under Fatca rules, information on US citizens’ accounts holding more than $50,000 must be reported to HMRC, who will then pass details to the IRS. Many other tax authorities around the world will do likewise.
Some firms have ceased to accept new US clients because of the amount of compliance effort that Fatca demands.
Financial institutions have until mid-2016 – depending on the client – to review their existing accounts to ascertain whether they qualify for Fatca reporting.
