A penalty measured in percentages of the trust, not pounds

Figures relate to tax year 2025-26 (UK) · 2025 (US)

Most tax penalties are a flat figure. Miss a form, pay a few hundred dollars, move on with your life.

Foreign trust penalties do not work that way. They start at 35% of what went into the arrangement, and at 5% of its assets for each year the trust return goes unfiled. A UK trust holding the family home can therefore generate a number that bears no relation to the tax at stake.

Key takeaways

• Penalties start at 35% of an unreported transfer into the arrangement.
• A further 5% of assets applies for each missing annual trust return.
• Two separate forms are involved, and the trust one falls due earlier.
• A UK trust is foreign for these purposes almost without exception.
• British trustees have no reason to know any of this applies.
• Where no tax was underpaid, the case for removing penalties is strong.

What do the penalties look like?

Larger than almost anything else in the system, because they follow the value involved rather than a flat figure. A single unreported transfer can carry a penalty running to more than a third of the amount that went in.

Which forms are involved?

Two work together. One reports your relationship with the trust and any transfers or distributions. The other is an annual information return for the trust itself, which the American owner must make sure somebody files.

The trust form carries its own earlier deadline.

Both go in for the same year, so treat them as one annual job rather than two.

Missing that deadline is the most common failure we see.

What does the trust return actually need?

A full set of UK trust accounts in dollars, details of the trustees and beneficiaries, and a statement for each American owner. British trustees do not prepare accounts in this format, so ask them well in advance.

The deadline falls earlier than your personal return.

Start the conversation with the trustees in January, not March.

What if the trustees refuse to help?

It happens, usually because they see no British reason to produce accounts in a foreign format. Explain that the obligation falls on you and that the figures they already hold are most of what is needed.

A short letter from an adviser usually resolves it.

Where it does not, the forms can be filed on best available information.

Who has to report it?

Americans in several roles. Whoever settled the UK trust reports it, and so does a beneficiary who receives a distribution. An American trustee can have obligations of their own, separate from both.

One trust can therefore generate several filings from different people.

Our guide to UK trust distributions covers the beneficiary side.

Can an American be a trustee?

Yes, though it changes the picture. An American trustee controlling substantial decisions can pull the arrangement towards domestic status, which alters the reporting for everybody involved rather than simplifying it.

Families sometimes appoint one without realising that.

Take advice before changing who sits on the trusteeship.

A worked example

The figures below are illustrative and use round numbers to show the mechanics.

Laura is American and lives in Surrey. In 2021 she settled £500,000 into a discretionary trust for her children, with her British brother as trustee.

Britain treats the UK trust as ordinary relevant property with its own charges. Nobody mentioned America, and no American forms were filed for four years.

Her exposure is not a few hundred dollars. Penalties here begin at a percentage of the value transferred and of the trust assets, which on £500,000 reaches a figure that alarms people.

What does the work actually cost?

Less than people fear once the classification is settled, because the annual filings become routine after the first year. The first year carries the analysis and the catch-up, so it is always the expensive one.

Weigh it against penalties measured in tens of thousands.

That comparison usually ends the discussion quickly.

What if nobody has ever filed?

This is common, and the position is usually fixable. Where nobody underpaid any tax, which is common with a grantor arrangement reporting modest income, the argument for removing penalties grows considerably stronger.

Coming forward before anyone asks matters more than the number of years.

Gather the years first so the picture is complete before anyone approaches the IRS.

Our guide to the voluntary disclosure practice covers the harder cases.

Is there a de minimis anywhere?

Very little. Narrow exceptions exist for certain foreign pension and savings arrangements, but an ordinary family settlement gets no relief at all for being modest in size. The obligation is the same whatever the value.

Size reduces the penalty in cash terms, not the obligation.

So a small arrangement still needs the same two forms each year.

What is a UK trust for US purposes?

A UK trust fails the American tests for being domestic, which catches almost every British family arrangement. Per IRS guidance, a trust is domestic only where a US court supervises it and US persons control the substantial decisions.

British trustees deciding British matters fail both limbs comfortably, so a UK trust is foreign by default.

So the label foreign is automatic rather than a judgement.

What is a grantor trust?

America treats it as still owned by whoever funded it, usually because they kept some power or benefit. Where that applies, the trust is transparent and its income goes on your personal return as if you earned it directly.

A great many British family arrangements land here.

So the trust pays no American tax, and you do.

Does the trust pay American tax?

Where the UK trust is a grantor trust, no. The income flows to you and you pay on it personally, which at least avoids a second layer of tax. The reporting still applies in full.

A non-grantor arrangement follows different rules, and far less kindly ones.

Establishing which type you hold is the first job.

What about a will trust?

A UK trust arising on death follows different rules from one you created while alive. The settlor is no longer around, so the grantor analysis changes and the focus moves to the beneficiaries and trustees.

An American beneficiary of a UK trust made by will still has obligations.

Those obligations often start before anybody has received a penny.

Does a bare trust count?

Usually not in the same way, because a bare trust holds assets for a named person absolutely rather than at trustee discretion. America tends to look through it to the beneficiary.

Accounts opened for children often work this way.

Our guide to Junior ISAs and US children covers that ground.

Does a life interest change things?

It can, because an interest in possession looks quite different from a discretionary arrangement. Somebody entitled to the income has a clearer position than one potential beneficiary among many, though the American analysis still starts with who funded it.

The American analysis still starts with who funded it.

Read the deed rather than relying on how people describe it.

What about a trust holding the family home?

Very common, and fully inside the rules. The asset being a house rather than a portfolio changes nothing about the reporting, though it often means little or no income arises each year.

Low income does not reduce the penalty exposure at all.

The penalty follows the value of the property itself.

What happens on the settlor death?

The grantor analysis ends, and the arrangement usually becomes a separate taxable entity for American purposes. Beneficiaries then face their own reporting when distributions arrive, on a different footing from before.

Britain has its own charges running on the same date.

Review the position in the year of death rather than afterwards.

How to review your position

1. Find the trust deed and establish who settled it and when.
2. Confirm whether any settlor, trustee or beneficiary is American.
3. Work out whether the trust is domestic or foreign on the American tests.
4. Establish whether it is treated as owned by the settlor.
5. List every transfer in and every distribution out, by date.
6. Ask the trustees for accounts in a usable format.
7. File both forms for each year, or take advice on catching up.

Can you unwind the trust instead?

Sometimes, though it rarely helps with the years already gone. Collapsing a UK trust brings British consequences of its own, including possible exit charges, and it does not erase the reporting that was due while it existed.

Deal with the history first, then decide about the future.

An arrangement that still serves its purpose is usually worth keeping.

Does Britain charge anything?

Yes, under an entirely separate system of entry, ten year and exit charges on relevant property trusts. None of it coordinates with the American reporting, and British trustees focus on those charges rather than your filings.

The two sets of advisers rarely speak to each other.

Ask your British adviser for the charge dates so both calendars sit on one page.

Somebody has to hold both halves, and it is usually you.

Does it affect your other American filings?

It can. Assets held in the arrangement may feed your annual foreign asset disclosure, and a bank account the trustees control can count towards the foreign account reporting threshold where you have authority over it.

Those are separate obligations with separate deadlines.

Our guide to FBAR signature authority covers the account side.

Who should hold the paperwork?

Keep your own copy of the deed, the accounts and every form filed. Trustees change, solicitors retire, and families lose documents between generations far more often than anyone expects them to.

A single folder solves most future problems.

Scan it as well, since the originals rarely live with you.

Mistakes and penalties we see with a UK trust

The first is assuming the solicitor who drafted the UK trust considered America. They had no reason to ask.

The second is filing the personal form and forgetting the trust return. The trust one carries the earlier deadline.

The third is treating a small trust as too minor to report. The penalty follows the assets, not the income.

The fourth is leaving it until a distribution happens. By then several years are outstanding.

How US UK Tax Accountants helps

We read the UK trust deed, establish the American classification, and work out who files what. Then we get the accounts into the right format and bring the outstanding years up to date with an explanation attached.

We also talk to your British trustees directly. Our treaty relief service covers the wider planning.

If an American name appears anywhere on a British trust, get in touch. The penalties here are the largest in the system and the fix is usually straightforward.

Last reviewed 1 October 2026. This article is general information and not personal tax advice. Every trust turns on its own facts, so take advice on yours before acting.