I remember there were good reasons for not setting UDS_LOCAL_PATH in kio_trash, but by now I forgot what they were exactly :-)

I expect that some code will resolve to local paths before getting a chance to notice that it's in fact a trash url and trigger trash-specific code.
But feel free to test that, provided the testing is complete enough :)
(context menu, properties dialog, dnd for restoring, ...). That last one is a good one, we need to make sure kio_trash is involved otherwise the .trashinfo file won't get cleaned up.