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TRUSTS - Tax Heads to keep in mind for FAE, P6 and P2 exams.

Posted on: Wednesday, June 01, 2016

INCOME TAX

The tax residence of the trustees is what determines the extent of their liability to Irish income tax.  When reading an exam question always pay attention to the residency of the individuals named as trustees.
If you are told that all the trustees in the exam question are Irish resident then they are liable to Irish income tax on the worldwide income of the trust from all sources.

If, however, the trustees are resident in say France or the U.S. for tax purposes, then the trustees will only be liable to Irish income tax on Irish source income.

The Trustees must pay income tax at the standard rate of 20% on any income arising but they will not be entitled to claim any of tax credits, allowances or reliefs as they are not deemed to be individuals.

If the income of the trust has not been distributed within eighteen months from the end of the year of assessment in which the income has arisen, there will be a 20% surcharge on this accumulated income.

In circumstances where a beneficiary has an absolute right or entitlement to the trust income as opposed to the Trustees then Revenue will assess the beneficiary directly.  In other words if the terms of the trust state that income is to be paid directly to a particular beneficiary as opposed to the trust then the beneficiary will be liable to Income Tax on the amounts received.  That individual must file the appropriate tax return and pay the relevant taxes within the deadline dates.



CAPITAL GAINS TAX

For the purposes of CGT, the trustees will to be Irish resident and ordinarily resident if the general administration of the trust is carried out in Ireland and if all or the majority of the trustees are resident or ordinarily resident in Ireland.

In general, if the trustees are resident or ordinarily resident in Ireland they will be liable to Irish capital gains tax on their worldwide gains.
If, however, the trustees are not resident or ordinarily resident in Ireland they will be liable to Irish capital gains tax in respect of any gains arising on disposal of specified assets including:
• Land and buildings in Ireland .
• Minerals in Ireland including related rights, and exploration or exploitation rights in a designated area of the continental shelf.
• Unquoted shares deriving their value, or the greater part of their value, from such assets as mentioned above.

Please keep in mind that, just as for Income Tax purposes, the trustees are not deemed to be individuals and are therefore not entitled to the annual CGT exemption of €1,270 which is only available to individuals.

Apart from selling/distributing the trust assets, the trustees will be deemed to have disposed of assets for CGT purposes in the following three situations:

1. Where the trustees cease to be Irish resident or ordinarily resident.
2. Where a life interest in the trust property has ended but the property continues to be settled property.
3. Where a beneficiary becomes absolutely entitled in possession to the settled property except in situations where it occurred as a result of the death of the individual with a life interest in that property.

Market Value rules are imposed on this event with the Trustees being deemed to have disposed of and immediately reacquired the property at open market value.  As with all CGT computations, the liability is calculated on the difference between its base cost and the deemed market value.



CAPITAL ACQUISITION TAX

Capital Acquisition Tax is only payable when the beneficiary actually receives a gift or inheritance.  Where a beneficiary receives the gift/inheritance under a deed of appointment from a trust then he/she will be taxed as if the benefit was received from the settlor or, in the case of an inheritance, from the testator.

Capital Acquisition Tax at 33% is payable by the beneficiary and is charged on the value of the gift or inheritance to the extent that it exceeds the relevant tax-free threshold amount.

A charge to Irish Capital Acquisition Tax will arise in the following situations:
• If the beneficiary is Irish resident or ordinarily resident on the date he/she receives the benefit.
• If the settlor is Irish resident or ordinarily resident either (a) at the date of setting up the trust or (b) on the date the beneficiary receives the benefit.
• In circumstances where the settlor is Irish resident or ordinarily resident at the date of his death a liability to Irish CAT will arise on a benefit taken on the settlor’s death
• Where the property, which comprised the benefit, is situated in Ireland.


Points to keep in mind

• The creation of a discretionary trust or the transfer of funds to a discretionary trust will not give rise to a charge to capital acquisitions tax.
• Distributions from a trust, however, can potentially give rise to both an Income Tax and a Capital Acquisitions Tax liability.  You’re probably asking yourself if a double charge to tax has arisen.  It has.  Regular or periodic distributions to a beneficiary will be subject to the individual’s marginal rate of Income Tax but can also, at the same time, be liable to CAT.  A Revenue concession exists where CAT is chargeable on the net benefit i.e. the benefit after Income Tax has been deducted.  Don’t forget, the small gift exemption of €3,000 per annum can also be deducted.



STAMP DUTY

Stamp Duty can arise on the transfer of assets into a trust at 1% in the event of shares, residential property valued at less than one million euros, etc. or 2% in the event of commercial property, business assets, etc.

There is no Stamp Duty on the transfer of assets into a trust that is created by a Will.

Where trust assets are appointed by the Trustees to the beneficiaries no Stamp Duty will arise i.e. there is an exemption from Stamp Duty in this situation.



DISCRETIONARY TRUST TAX

Discretionary trust tax of 6% is a once off charge based on the value of assets comprised in a discretionary trust.  

If the Trust is wound up and all the assets are appointed within a five year period then 50% of this initial charge will be refunded i.e. 3%


The initial charge is due and payable on the later of the following dates:

• The death of the settlor or
• Where the last of the “principal objects” (i.e. spouse, child or child of a predeceased child of the Disponer) has reached his/her 21st birthday.

A 1% annual charge on undistributed assets comprised in a discretionary trust will arise every year on 31st December.  This annual levy, however, will not arise within the same 12 month period as the initial charge of 6% has been levied.