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HMRC internal manual

International Exchange of Information Manual

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Charities: Debt or equity interest in a trust

IEIM404750: Charities: Financial Account: Debt or Equity Interest in a Trust

 

Many charities are set up as trusts or similar legal arrangements, legal arrangements covers arrangements other than trusts that are not companies or partnership and includes unincorporated associations and other arrangements. The Financial Accounts and Account Holders are similar for all these structures. For charities set up as companies, see IEIM404760.

A charitable trust will be a trust for the purposes of the AEOI regimes, regardless of whether its trustees have incorporated as a body (e.g. under section 251 Charities Act 2011) or one or more corporate bodies have been appointed as its trustees.

A charitable company or charitable incorporated organisation that holds property in trust (e.g. as permanent endowment) separately from its corporate assets may therefore have a reporting obligation in respect of the assets held in trust that is separate from its reporting obligation in respect of its corporate assets.  

 

Equity Interest

An equity interest in a trust or similar arrangement is held by any person treated as a settlor or beneficiary of all or part of a trust, or by any natural person exercising ultimate effective control over the trust. A person is treated as a beneficiary if they have the right to receive, directly or indirectly, a mandatory distribution; or they receive, directly or indirectly, a discretionary distribution from the trust. In the case of discretionary distributions the beneficiary will only be treated as a beneficiary in the calendar year in which they receive a distribution.

For most charitable trusts their beneficiaries will be the individuals and entities to which they make grants or other distributions. The purpose of the grant is not relevant, it is the fact of receiving a grant that makes the person a beneficiary. Most grants will be paid over a finite period of time and at the trustees’ discretion, so the grantee will only be treated as beneficiary in those years they receive a grant and there will be no ongoing obligation to treat the grantee as a beneficiary in subsequent years.

A charitable company or charitable incorporated organisation that holds property in trust (e.g. as permanent endowment) separately from its corporate assets may therefore have a reporting obligation in respect of the assets held in trust that is separate from its reporting obligation in respect of its corporate assets.  

For guidance on indirect beneficiaries of a charitable trust, see IEIM404755.

 

Settlors

A settlor of a trust has an equity interest in the trust.  Most donors to a charity will not be treated as settlors and so will not hold an equity interest in the trust.

For a normal charitable donation, where a donor makes an irrevocable donation with no control over the donated funds, then they are not treated as a settlor of the trust and therefore are not reportable.  Conditional donations, where the donor specifies the use of the donation, for example by stipulating the supplier to be used to provide goods or services, or requiring payments to be made to a specified third party, will result in the donor being considered a settlor of the trust.

 

Debt Interests

Debt interests include all loans made to a charitable trust and other forms of indebtedness, including formal and informal arrangements, whether or not any interest is attached to the debt. Debts owed by a charity to trade creditors that do not relate to the lending of money are not included. A debt interest will also include a program-related investment or social investment in the form of a loan.

 

Once a charity has identified its debt and equity interest holders it will have to carry out due diligence on them to identify whether any of them are Reportable Persons [see IEIM404800].