A trust could fall within any of the definitions of Financial Institution depending on the nature of its activities and the assets it holds. For example, a Trust could be a Custodial Institution where an Employee Benefit Trust continues to hold shares for an employee after they have been granted.
Trusts as Financial Institutions
For most other structures, it is expected that a trust will be treated as a Financial Institution most commonly where it meets the definition of an Investment Entity.
The Agreement sets out that a Trust is, for these purposes, to be treated as an Entity.
For full details of what constitutes an Investment Entity, please refer to Section 2.28 above. However, an Investment Entity is broadly an entity that undertakes investment activity on behalf of customers, or (and more relevantly for Trusts) an entity that meets the financial assets test AND is managed by a Financial Institution.
With regard to Trusts, the test of being managed by a Financial Institution will be met where the Trust or its activities are being “professionally managed” (this would typically be where either one of the trustees is a Financial Institution, or the trustees have appointed a discretionary fund manager to manage the trust’s assets).
If it is not professionally managed, then the Trust will not be an Investment Entity. This means that the trust is likely to be treated as an NFFE (see Section 2.6 above) rather than a Financial Institution.
So, a Trust will be “professionally managed” and an Investment Entity, and, therefore, a Financial Institution, where:
A Trust, which does not meet these conditions, will not be an Investment Entity. For example, where a non-professionally managed trust has a Depository Account with a Financial Institution, and where that Financial Institution does not manage the account or the funds in the account, then that would not result in the Trust being treated as a Financial Institution.
Does a Financial Institution manage the Trust?
A Financial Institution will manage the Trust where it has been appointed by the trustees to carry out the day to day functions of the Trust on behalf of the trustees. This goes beyond managing the investment of the Trust’s assets and includes other management functions that the trustees have to perform but which are contracted to the Financial Institution.
Does a Financial Institution manage the Financial Assets of the Trust?
A Financial Institution manages the Financial Assets of the Trust where it manages the investment strategy for the assets. This will usually be where the Trust has appointed a discretionary fund manager to manage their portfolio. Engaging a Financial Institution to manage the investment portfolio of the Trust will lead to the Trust being an Investment Entity even when the portfolio being managed contains assets that are retail investment products (although it is unusual only to have retail investment products in a professionally managed portfolio).
For example, if a Trust holds an insurance policy provided by a Financial Institution this would not on its own lead to the Trust being an Investment Entity. Although the underlying investments that fund the policy will be professionally managed (by the Financial Institution providing the product), the product itself is not being professionally managed. In this situation, the Trust would be a non-Financial Entity holding a Financial Account with other Financial Institutions.
The requirement that the Financial Institution has the management of the investment strategy of the assets means that the holding of certain assets (such as units purchased in investment funds) may superficially appear to meet that condition. However on closer inspection, the simple holding or acquisition of a retail type product or service will not meet the condition.
A Financial Institution that is engaged by the Trust solely to acquire or dispose of Financial Assets does not amount to the management of those assets by the Financial Institution. Engaging a Financial Institution in this way, for instance, to provide broker services, would not lead to the Trust being an Investment Entity.
Where the assets being managed are in a pool used to fund the product or service purchased, the mere acquisition of that product or service will not constitute professional management of the assets of the Trust. In this case, the Trust holds a fixed asset that increases in value through the management of the pooled assets being invested (similar to a bank investing their pooled deposits collectively). The Trust’s holding of that fixed asset is not being professionally managed. Investment products and services of this nature may include:
Other products and services that provide an interest in managed portfolios of underlying assets and are also sold on a retail basis will not lead to the Trust being treated as professionally managed for the same reasons. The Glossary of Definitions in the Financial Services Handbook defines retail investment products. A Trust that acquires a retail investment product, or purchases a financial service that is designed to give a similar exposure and return to a retail investment product, and is sold on a retail basis, will not be treated as an Investment Entity solely because of this acquisition.Collectively managed investments that are sold on a retail basis may include:
If the Trust has acquired these assets through retail investment only then the Trust will be an NFFE that is holding a Financial Account or other similar asset.
The Society for Trust and Estate Practitioners (STEP) in conjunction with the Law Society for England and Wales and The Institute of Chartered Accountants in England and Wales (ICAEW) have produced a series of questions and supporting flowchart that may be useful when considering the status of a Trust. Please note that use of this flowchart will in no way take the place of HMRC guidance, and it should be used as a supplementary tool only.
Any information accessed from the link above should not be reported as representing the official views of HMRC or of its employees. The opinions expressed and arguments employed are those of the authors.
In some cases, a retail financial service may acquire certain assets in the name of the customer, so they are held ‘outside wrapper’, such as a portfolio including direct security holdings under a managed advisory mandate. This is commonly done for cost reduction and/or risk management purposes by the service provider. Where these products are acquired as part of a retail service, then this will not lead to the holder meeting the ‘professionally managed’ test.
If the customer has acquired additional assets that are not connected to the financial service, such as shares transferred in by the settlor, then these assets can only lead to the holder meeting the ‘professionally managed’ test if those assets are themselves subject to professional management.
As a rule of thumb, an entity that is not eligible to be deemed as Professional Investors Client under the categorisation in the Conduct of Business Sourcebook (COBS 3) of the FCA Handbook is not expected to be an FI. Where an entity has purchased an investment product or service on a retail basis from a Financial Institution, this will usually be a financial account maintained by the service provider, and it will not affect the status of the client.
However, if the entity in question has engaged another Financial Institution to undertake an investment business/activity on their behalf (rather than simply acquiring a retail investment service), then this position is subject to rebuttal.
Trusts as Non-Reporting Financial Institutions
Under the Agreement, a Trust that is a charitable organisation will be treated as a Non-Reporting UK Financial Institution (see Section 2.12).
Trusts that are not Financial Institutions
Where a Trust is not a Financial Institution, it will be an NFFE. In such circumstances, it must be determined whether the Trust is either an Active or Passive NFFE (see Section 2.6).
Where the Trust is a Passive NFFE, the Financial Institutions where the Trust holds Financial Accounts will be required to undertake the necessary due diligence procedures to determine if any of these accounts are Reportable Accounts.
Registration – Trustee documented Trust
For UK resident Trusts that are Investment Entities where the Trustee of the Trust is a Reporting Model 1 Foreign Financial Institution, Participating Foreign Financial Institution or Reporting US Financial Institution, and the trustee reports all information required with respect to all US Reportable Accounts of the Trust, the Trust itself will be treated as a Non-Reporting UK Financial Institution and will not be required to register with the IRS.
Where the Trust is an Investment Entity because it is managed by a Financial Institution, but that Financial Institution is not the Trustee, the Trust will be required to register as an Investment Entity unless the Trust can take advantage of the Sponsored Investment Entity, or Owner Documented Financial Institution categories.
Trusts that are Investment Entities but are not in a position to take advantage of the Trustee Documented Trust, Sponsored Investment Entity or Owner Documented Financial Institution Deemed Compliant categories can use a third party service provider to meet their obligations under the Agreement. However, the legal responsibility remains with the Trust.
The information to be reported about Trusts that are Investment Entities will be the Debt or Equity Interest in the Trust as set out in Section 3.8.
This applies to interests held by:
The information required on Specified US Persons will be:
Balance or Value
The balance or value to be reported regarding a person who is the Beneficial Owner of a portion or all of the Trust will be the most recent value calculated by the Financial Institution.
The balance or value for a beneficiary that is entitled to a mandatory distribution (either directly or indirectly) from the Trust will be the net present value of amounts payable in the future.
Where a specified US person has a mandatory interest in the trust, the net present value of their future interest should be measured on a recognised actuarial basis.Where the settlor of the trust is a US person, the total value of the assets of the trust must be consistent with that used by the trustees for valuation purposes and should be based on a recognised accounting standard. While it would be normal to value listed securities at the appropriate market rate on the day concerned, it is acceptable to value unlisted securities at the original book value unless another accounting basis was used by the trust for normal valuation purposes.
Payments to be reported are the total gross amounts paid or credited to any Beneficial Owner and beneficiaries who receive mandatory or discretionary distributions during the calendar year or appropriate reporting period, including aggregate payments in redemption (in whole or in part) of the account.
Employee Equity Incentives
Shares held in trust under an employee equity incentive arrangement may be in a Financial Account and, therefore, subject to Reporting by the Financial Institution that holds the account. This is subject to certain employee equity incentives not being treated as Financial Accounts under Annex II of the Agreement (see 3.13).
Where an Employee Benefit Trust holds shares for the future benefit of employees, but the shares are not allocated, and then under most circumstances this right to a future allocation would not fall to be either a Custodial or an Investment Account.
In cases such as Employee Benefit Trusts, or other similar structures which do NOT maintain financial accounts, when shares are allocated, and the trustee is directed as soon as reasonably possible to transfer the assets (to the beneficiary, broker, custodian, etc.), the Trust will not be treated as maintaining a Financial Account for the duration of time it takes to complete the transfer.