Jeff Salway:Tax-dodging law goes for family trusts

Scots who have made provision for children through trusts may fall foul of US laws. Picture: Contributed

FAMILIES in Scotland are being told to pay hundreds of pounds to ensure that financial arrangements typically used to protect beneficiaries don’t fall foul of a little-known piece of United States legislation.

The foreign account tax compliance act (Fatca) is designed to close a loophole in US tax law and at first seems harmless enough for taxpayers on this side of the pond.

But while Fatca is part of US reporting requirements, it applies to people in the UK because of an inter-governmental agreement between Westminster and the US that binds both countries to the rules. That means ordinary UK family trusts are affected even where there is no connection with the US.

Tens of thousands of people in the UK are now being told by their accountants that they must cover the cost of the reviews being carried out to ensure their trusts don’t fall into the Fatca trap.

The rules primarily affect families who have set up trusts in order to shelter investments for beneficiaries and to protect the proceeds of insurance policies and investments.

John McArthur, partner at Gillespie Macandrew in Edinburgh, said: “Trusts are an established route in Scotland to protect assets for beneficiaries, whether created under a will to protect a child’s inheritance or to hold investments, either stocks and shares or insurance-based products (investment bonds generally) for the beneficiaries.”

These trusts must now be reviewed, at a cost to the individual, to ascertain whether the Fatca measures apply. The Fatca rules are aimed at closing a perceived US tax loophole by forcing institutions such as banks, brokers and fund managers to report payments made to US citizens anywhere in the world, or face potentially punitive tax penalties.

However, the definition of an institution under Fatca also includes trusts whose assets are managed by another financial institution on a discretionary basis, said McArthur. UK-resident trusts come under the scope of Fatca if they have a US beneficiary, settlor or investments. The problem is that all trusts have to spend time and money making sure they’re not affected. “Trustees will soon, if they have not already done so, receive letters from their advisers asking about the Fatca status of their trust,” McArthur explained.

“The reason for this is that the financial institution might find itself subject to the withholding tax if it is shown that money managed by the institution on the trust’s behalf has been paid to the trust, which is transferred to a US citizen without it being reported under Fatca.”

Accountants have been given until 25 October to work out which trusts need to comply with the rules, or risk hefty penalties.

“HM Revenue & Customs estimates that the initial costs of compliance with Fatca will be between £900 million and £1.6 billion, with ongoing annual costs up to £90m. All this to protect the tax income of the US with no benefit to the UK exchequer,” said McArthur.

That will throw the future of some trusts into doubt by adding to their compliance burden and raise the question of whether it’s viable for them to continue operating.

Ronnie Ludwig, a partner at chartered accountants Saffery Champness, said: “The whole thing is a nightmare. All accountants must complete a thorough review of their client base, including what investments they have.”

People who are beneficiaries of trusts – including those in which insurance bonds are the only investment – have to co-operate with trustees and prove they don’t have any US connections.

Individuals who own investments managed by a financial institution will also have to comply with their requirements under Fatca by showing they have no connections with the US, said McArthur.

While individuals with trusts don’t risk penalties, many will have to pay for the reviews being carried out.

“Fees of between £300 and £500 look to be the norm and then there will be ongoing costs incurred by the trustees or their agents reviewing the information and advising of any changes within three months of there being any changes,” said McArthur.