In our latest article, we explore the main tax considerations relevant to the establishment and management of trusts. A trust is an arrangement where a trustee holds assets for the benefit of one or more beneficiaries. Trusts can be established during a person’s lifetime or through a will, coming into effect upon death. They serve various purposes including safeguarding assets for minors, individuals with disabilities, or general asset protection. Once a trust is formed, trustees are responsible for managing the trust assets for the beneficiaries’ benefit. They must register the trust for tax purposes and obtain a unique tax number separate from their personal tax affairs.
Tax Heads Relevant to Trusts
Capital Gains Tax (CGT)
When establishing a trust during a person’s lifetime and transferring assets into it, Capital Gains Tax (CGT) may be applicable, based on the market value versus the acquisition value of the assets. For trusts created through a will, no initial CGT is imposed, as assets are inherited at their market value on the date of death. The tax residency of trustees significantly affects CGT liability: Irish residents are liable for worldwide gains, whereas non-residents are only liable for specific gains, such as those from land in Ireland.
Typically, if most trustees reside or are ordinarily resident in Ireland and the trust’s administration occurs there, they are accountable for CGT on global gains. Conversely, if the trustees are not primarily based in Ireland, they are only liable for Irish CGT on gains from specific assets, specifically:
- Land and buildings in Ireland;
- Mineral rights in Ireland, including exploration and exploitation rights; and
- Unquoted shares deriving their value primarily from the aforementioned assets.
Trustees are assumed to have disposed of assets for CGT when:
- They cease to be resident or ordinarily resident in Ireland (migration);
- A life interest ends, yet the trust continues. No CGT arises if the trust ends upon the cessation of a life interest and the beneficiary gains absolute entitlement, as in “to A for life, remainder to B.” Upon A’s death, the assets belong to B, and transferring them does not trigger CGT.
- A beneficiary becomes absolutely entitled to trust assets, excluding situations like the previous example. For instance, if “to B on reaching 25” applies, upon B turning 25, the trust may incur CGT on the increase in asset value over the years.
In these scenarios, market value is applied, and trustees are considered to have disposed of and reacquired the assets at that value. Should CGT accrue, it can be credited against any Capital Acquisitions Tax the beneficiaries might owe when inheriting assets upon the trust’s termination. Notably, trustees do not qualify for the annual CGT exemption of €1,270.
Income Tax
The tax residence of trustees is pivotal in determining a trust’s liability for Irish income tax. If all trustees are residents of Ireland, they are liable for Irish income tax on global income. Conversely, non-resident trustees are subject only to Irish income tax on income sourced from Ireland.
Trustees are taxed at a standard rate of 20% and are ineligible for the credits, reliefs, or allowances available to individuals. Additionally, a 20% surcharge is imposed on any income retained in the trust that hasn’t been distributed within 18 months of the end of the tax year in which it was earned.
When a trust beneficiary has an absolute right to the income (such as a life tenant), the trustees are exempt from income tax on those specific funds, and the beneficiary is assessed directly by Revenue.
Trustees must adhere to the same tax return deadlines and filing requirements as individuals.
Stamp Duty
When transferring assets into a living trust, stamp duty may be applicable. For residential properties, a stamp duty rate of 1% is imposed, while commercial properties are subject to a 2% rate. However, cash transfers are exempt from stamp duty. Additionally, no stamp duty is levied on assets transferred to a trust established through a Will. Similarly, when assets are distributed to beneficiaries as per the trust’s terms, no stamp duty is incurred.
Capital Acquisitions Tax (CAT)
CAT applies to gifts and inheritances. No CAT is incurred when assets are transferred to a trust, as beneficiaries are not yet entitled to possess the assets. When a beneficiary receives an asset from the trustees, it is taxed as if the settlor or deceased had provided the benefit.
The standard CAT thresholds are as follows:
- Group A: Includes children, minor children of predeceased children, and parents inheriting directly from their child: €400,000;
- Group B: Covers grandchildren, siblings, nieces, and nephews: €40,000;
- Group C: Pertains to all other individuals: €20,000
If these thresholds are exceeded, CAT is levied at 33% on the excess. The thresholds are lifetime limits, meaning any previous gifts or inheritances received since December 5, 1991, may reduce or exhaust them.
CAT may arise under these conditions:
- If the beneficiary is resident or ordinarily resident in Ireland when they receive the benefit;
- If the settlor is resident or ordinarily resident at either the time of setting up the trust or when the beneficiary receives the benefit;
- If the settlor is resident or ordinarily resident at death, CAT is applicable on any benefit taken on their death;
- If the assets are located in Ireland.
A foreign-domiciled person is not considered resident for CAT purposes until they have been an Irish resident for five continuous years.
Distributions from a trust may incur both income tax and CAT. If income passed to a beneficiary has already been taxed on the trustees, a Form R185 should be provided to the beneficiary to claim a tax credit for taxes paid by the trustees, with the income taxed in the beneficiary’s hands as per standard procedures. Distributions from the trust can be from capital or income, and their nature in the beneficiary’s hands will determine tax implications. In the case of The Trustees of the Will of HK Brodie (Deceased) v CIR, it was established that capital payments can be treated as income if they are received as income by the beneficiary.
Regular or periodic distributions to a beneficiary may be subject to both income tax and CAT. However, a revenue concession exists where CAT is charged only on the net benefit.
Discretionary Trust Tax
The discretionary trust tax is applicable only when the settlor is dead and the principal beneficiaries (either the settlor’s children or the children of a deceased child of the settlor) are over the age of 21. An initial charge of 6% is levied under these conditions, specifically when the last principal beneficiary turns 21. Should the trust be dissolved within five years, a 50% refund of the initial charge can be obtained. In cases where the trust is established through a will and all beneficiaries are over 21, the tax liability arises on the date of death, with the estate having four months to settle the tax.
Subsequently, an annual charge of 1% is imposed on the trust’s value as assessed on December 31st each year. However, this charge does not apply to any assets vested in the beneficiaries absolutely, whether for life or for a term of five years or more.
Understanding the intricate tax implications of trusts is essential before their creation. Our probate team is available to assist with any questions or provide expert advice tailored to your needs.
