Keeping it in the family

  • Author : Niamh Keogh
  • Date : December 2012
ABOUT THE AUTHOR: Niamh Keogh is an associate at William Fry Tax Advisors

Ireland is widely acknowledged as a jurisdiction of choice for structures such as corporates and regulated funds. However, it can also offer an attractive regime for the management and control of private family wealth structures. This article considers the Irish legal and tax regime for family trusts established by non-Irish residents.1

Tax issues

The taxation of trusts is specifically provided for in Irish tax law, principally through the Taxes Consolidation Act 1997 and the Capital Acquisitions Tax Consolidation Act 2003.

The rules to determine the residence of a trust for Irish tax purposes differ for income tax and capital gains tax (CGT). However, both tests require an analysis of the residency position of the individuals or companies who act as trustees.

An individual will be Irish resident for tax purposes where that individual spends 183 days or more in Ireland in any tax year, or 280 days over two consecutive tax years (provided the individual spent at least 30 days in Ireland in each of those years).

A company incorporated in Ireland is regarded as resident in Ireland for tax purposes, subject to some exceptions. Where a company is not incorporated in Ireland, it would be regarded as Irish tax resident if it is managed and controlled in Ireland.

CGT

The rules to determine the residency position of trustees as a body for CGT purposes are set out in legislation. Trustees (other than professional trustees) are deemed to be tax resident in Ireland for CGT purposes unless:

  • the general administration of the trust is ordinarily carried on abroad; and
  • the trustees, or a majority of them, are not resident or ordinarily resident in Ireland.

However, there are special rules for professional trustees/trust corporations. A professional trustee can be deemed non-Irish resident (for CGT purposes) if the following conditions are satisfied:

  • the trustees are acting in the course of a business which consists of the management of trusts; and
  • they are acting as trustees of the particular trust in the course of that business; and
  • the whole of the property in the trust consists of or is derived from property provided by a person who was not domiciled, resident or ordinarily resident in Ireland at the time he provided the property.

If, on the basis of these rules, the trustees (or a majority of them) are non-resident, the general administration of the trust is also deemed to be carried on outside Ireland. Therefore, if a trust has a single professional Irish trustee, it can be considered non-resident for CGT purposes. Such a trust would therefore only be liable to Irish CGT on certain Irish situate assets such as real property.

Income tax

It is the tax residence of the trustees that determines the extent of a trust’s liability to income tax. If all of the trustees are resident in Ireland, the trust will be treated as resident and the trustees subject to Irish income tax on the worldwide trust income. Equally, if none of the trustees are Irish resident, they will only be taxed on Irish source income. The question as to how trustees are to be taxed if some, but not all, are resident in the jurisdiction has never been addressed in Ireland. In the absence of legislation, it is understood that the principles established in UK case law2 would be of persuasive authority in Ireland and that, in order to ensure that the trust is resident in Ireland for income tax purposes, all of the trustees should be Irish resident.

The rate of income tax applicable to trustees is 20 per cent, and a further surcharge of 20 per cent applies to the undistributed income of discretionary trusts. However, whether there is taxable income accruing to the trustees will depend on the manner in which underlying investments are held.

Trustees may also arrange for part or all of the trust income to be paid directly from its source to one or more beneficiaries so that the income is not in fact received by the trustees. In such cases, no income tax issues may arise for the trustee as the income so paid may be assessable directly on the beneficiary. Where a beneficiary is neither resident nor ordinarily in Ireland and is entitled to the trust income as it arises, there may be no Irish tax liability except to the extent that the income is Irish source income.

Stamp duty

The mere fact that foreign property is transferred to Irish trustees or by Irish trustees should not trigger any Irish stamp duty charge. However, a document can fall within the charge to Irish stamp duty (at a rate of up to 2 per cent) where it is executed in Ireland or it relates to Irish property or to something that is done or to be done in Ireland.

Capital acquisitions tax3

Capital acquisitions tax (CAT) refers to gift/inheritance tax. Ireland imposes a charge to CAT on absolute benefits provided from trust assets where the disponer/settlor or beneficiary are or were Irish resident or ordinarily resident at a particular time or where the trust property is Irish situate.

If a settlor was at no time resident in Ireland and the potential beneficiaries are also not Irish resident, the only time a distribution from a trust would be subject to Irish CAT tax is where the property distributed is Irish situate. If a beneficiary were to become Irish resident, he/she could be within the scope of Irish CAT. However, there is an exception for those who are non-Irish domiciled, that should allow a beneficiary to reside in Ireland for at least five years before coming within the charge to Irish CAT on non-Irish assets.

Discretionary trust tax

Discretionary trust tax (DTT) consists of a 6 per cent one-off charge and an annual 1 per cent charge on the value of property held in discretionary trusts in certain circumstances.

However, this charge only applies where the settlor is Irish resident or ordinarily resident at the date he settles the assets or where the assets are Irish situate.

Legal environment

Trust law in Ireland is governed by common law and legislation. However, for the most part, these rules, which set out the powers and duties of trustees, can be overridden by the terms of a trust instrument. The legislation dealing with trusts and trustees in Ireland is mainly contained in the Trustee Act 1893, the Trustee Act 1931, the Trustee (Authorised Investments Act) 1958 and the Land and Conveyancing Law Reform Act 2009 (the 2009 Act). The Hague Convention on the Law Applicable to Trusts and on their Recognition has not yet been ratified in Ireland.

Under anti-money laundering legislation, any person wishing to carry on the business of a trust or company services provider in Ireland has to obtain authorisation to do so. Failure to do so is an offence and liable to fines and/or imprisonment.

There is some similarity between Irish trust law and the law in other common-law jurisdictions. However, while common-law precedents of other jurisdictions remain of persuasive authority in Ireland, the law has developed differently in the past number of years. Changes include the following:

  • The rule against perpetuities, which restricted the length of trust period, was abolished for present and future trusts under the 2009 Act.
  • Provision has been made for the variation of trusts. The 2009 Act confirms that a trustee, beneficiary, or any other person concerned may bring an application to court to vary, revoke or resettle a trust or vary, enlarge, add to or restrict the powers of trustees under the trust, subject to the Revenue Commissioners not having satisfied the courts that the variation is substantially motivated by a desire to avoid or reduce tax. The ability to vary the terms of a trust is otherwise very limited under Irish law although it is possible for an Irish court to vary the terms of a trust under bankruptcy, creditor, succession or family law in certain circumstances.

Further changes have been recommended and may be legislated for in the future. The suggested changes include the following:

  • That trustees should be subject to a general statutory duty of care that cannot be excluded by deed. At present, the duties of the trustee are provided for primarily in case law.
  • That trustees should be given clearly stated powers to borrow, and to buy and sell property, provided they comply with their duty to act in good faith. At present, the powers of trustees under Irish law are quite limited and the trust documentation must provide for any powers that might be needed in order to deal with the trust assets.
This article does not deal with other structures for managing wealth that may be relevant depending on the circumstances and level of assets involved, e.g. the Irish Qualified Investor Fund.
Dawson v CIR [1989] STC 473; [1989] 2 WLR 858.
It is assumed that the trust is established after December 1999 for the purpose of this article. The rules for a pre-December 1999 trust are based on the domicile rather than the residence of the settlor.

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