FATCA – treatment of trusts clarified

Since the regulation and reporting requirements under the US Foreign Account Tax Compliance Act (FATCA) came into force on 1 July 2014, HM Revenue & Customs (HMRC) has clarified how it will treat trusts that own assets managed by a financial institution. The clarification also applies to the new British regulations requiring the Crown Dependencies and Gibraltar to report client information to the UK that also came into force on 1 July 2014.

Trusts will be classed as FATCA regulated financial institutions (FIs), if the financial assets are directly held by the trust and the direct holdings of the trust are managed by an FI or if a trustee is an FI.

Until now, the uncertainty has centered on trusts whose financial assets are only pooled assets, such as investment bonds or insurance products. HMRC has now declared that in these cases, the management of the assets by an FI does not in itself make the trust an FI. Instead, the trust will be classed as a ‘non-financial foreign entity’ (NFFE) and the FATCA reporting responsibilities will lie with the insurance company or fund manager rather than the trust. Foreign in this context is by reference to the USA.

However, if the trust itself is professionally set up and managed, or there is a manager appointed by the trust to manage these investments so the trust’s direct holdings are also being professionally managed, the trust will then still qualify as an investment entity. This will apply whatever the nature of the financial assets.