Types of Trust
Tax rules make persons such as trustees, nominee holders of securities, personal representatives and others in similar positions, personally responsible for capital gains tax in relation to the trust assets. There are similar responsibilities for income tax. The liability may be satisfied from the trust fund or equivalent. They may incur personal liability where they distribute funds without making provision for the tax.
There are a variety of trustees and representatives. The types of interests and arrangements under a trust may vary considerably. Under some arrangements, the trustee is a mere nominee for the beneficiary. In other trust arrangements, the trustee or nominee has considerably more obligations and discretion and the beneficiary’s rights are correspondingly less.
At the other extreme to the bare trustee / nominee, is the case of a discretionary trust. In this case asset are transferred to trustees and held by them, with power to transfer ownership to one or more members of a specified class of persons, if and when they so choose.
Where assets are held in the type of trust (or so called settlement) where the beneficiaries are not absolutely entitled to the trust assets, then greater obligations are placed on the trustees.
Bare Trustee / Nominee
A trustee may be a bare nominee, who holds assets in his name, but with the beneficial owner ascertained and absolutely entitled to it. In this case, the trustee arrangement will end as soon as the beneficiary calls for the nominee / trustee to transfer the legal title to the asset to him. The only reason a nominee or trust arrangement exists is because the legal title e.g. registered ownership of shares or land is in the name of the trustee.
Where the beneficiary is absolutely entitled to the asset, subject only to the trustee’s bare legal ownership, the asset is treated as if it belonged to the beneficial owner for most taxation purposes. The trustee or nominee will have reporting and withholding obligations, until the legal ownership is transferred by him.
In the case of a bare trustee or nominee, the capital gains tax legislation treats the beneficial owner as the real owner. Where there is a disposal of assets, this is treated as being made by the beneficiary. The trustee or nominee have withholding and reporting obligations.
The nominee or bare trust treatment applies to certain legal roles by which a person administers assets. The assets of a bankrupt person are administered by his trustee in bankruptcy or the official assignee. They are deemed to act as bare nominees for the bankrupt. Similarly in company liquidation, the assets are deemed to be vested in the liquidator as nominee of the company. They are obliged to account for the bankrupt’s or insolvent company’s tax
Trusts, other than bare trustee / nominee arrangements place greater tax obligations on the trustees. The legislation applies to any type of trust or equivalent arrangement, other than one where the trustees are mere bare nominees for the beneficiaries. It would cover any of the following examples and more.
In the case of a discretionary trust, the beneficiaries have no specific interest in the trust assets, but only the right to be considered in relation to a potential transfer. In this case, the beneficiaries are not deemed owners of the property from a tax or most other perspectives, unless and until the asset or part of the asset is transferred to them.
Another type of trust is one which provides that the income of the trust assets is to be held or accumulated for the benefit of certain persons for a period of time. It will typically, provide for an outright transfer of the assets to the same or other persons after that period. There may be fixed rights for beneficiaries, combined with the possibility to benefitting from discretion.
For example, beneficiaries may be entitled to the income of the trust assets at the trustee’s discretion for a period. One or more of them, may be given ownership of the assets at the discretion of the trustees at a particular point. In each case the beneficiaries’ interests are not absolute.
The trustees are deemed to be a single continuing body. Therefore, the resignation and replacement of a trustee will not have capital gains tax consequences. The remaining trustees and replacement trustees will simply be deemed to be the same entity.
Trustees are deemed to be resident and accordingly, subject to Irish tax, if either the general administration of the trust is carried out in Ireland or a majority of them reside or ordinarily reside in Ireland. Being so resident, the trustees are within the scope of Irish capital gains tax on their worldwide disposals.
There are certain exemptions from Irish tax for disposals by professional trustees who provide professional trust services in respect of trusts created by persons not domiciled, resident or ordinarily resident in Ireland, when the trust was created. This exception facilitates certain international financial services.
Creation of Trust
Where assets are transferred into a trust by the person who creates it, he is deemed to dispose of those assets, for capital gains tax purposes. Because they are transferred to a connected person (the trustee is so deemed), they are deemed to be transferred at market value with a possible capital gains tax liability.
The trustees are deemed to acquire the assets at the market value when the trust is created. After that, the trustees are the persons who are assessed for capital gains tax, rather than the person who created the trust or the beneficiary.
Holding Trustee becoming Bare Nominee
A trust may originally be a discretionary or holding trust, where the beneficiary’s rights “kick in” at a future date. If and when the trust assets are appointed or where a beneficiary becomes entitled to them (for example, by reaching a certain age), there is a change in status notwithstanding that the assets remain vested in the nominee. The trustees continues to hold the assets, but does so as nominee.
Capital gains tax deems there to be a disposal of the assets, where a person becomes entitled to all or some of the trust assets absolutely, even without the formal transfer of title. The assets are deemed disposed of by the trustees at market value with a consequent potential charge to capital gains tax.
The trustees are deemed to dispose of the assets at markets value and are deemed to reacquire them as bare nominee. The beneficiary is deemed to dispose of his interest under the trust in return for the assets to which he then becomes entitled. There are certain exemptions which may apply.
Disposals or investments of the trust assets themselves, by the trustee are subject to CGT in the usual way. If the trustees themselves sell the assets in the course of the trust (for example, to convert an asset into cash) this is subject to capital gains tax on the difference between the acquisition value (as above) and the sale price. The assets and their proceeds remain trust assets.
When assets are transferred absolutely to a beneficiary, there is a deemed disposal at market value (and consequent Capital Gains tax charge) and an acquisition at market value by the beneficiaries. This applies provided that the beneficiary becomes absolutely entitled to the assets.
Interests under Trust
If an asset is transferred by the trustees for life or for a term of years, so that it does not leave the trust there is no disposal / capital gains tax occasion. The beneficiary acquiring the asset is deemed to acquire it at market value.
Where a person entitled to trust assets for life dies, the trustees are deemed to dispose of the trust assets concerned and reacquire them at market value. If the trust then ends there is no capital gains tax. However if the trust then continues e.g. for another person’s life or conditions still apply to the assets a capital gains tax charge arises.
Where a person becomes entitled absolutely to the assets, he is deemed to dispose of his interest in return for the assets. This disposal is generally exempt. The trustees are deemed to dispose of the assets at market value. Capital gains tax may apply [other than on where this happens on a death].
If any part of the funds released represents invested accumulations of trust income (which, as such, has been liable to Income Tax), there will be no CGT charge in
When the trust is wound up in whole or in part unused losses pass to the beneficiaries.
Where a person transfers assets to a trust, there is a disposal by that person who thereby creates the trust. This would be the case even if the person concerned is a beneficiary of the trust.
A beneficiary (as well as the trustees) is deemed to dispose of his interest under the trust when he becomes absolutely entitled to assets from it. However generally there is an exemption for disposal of an interest under a trust so that no capital gains tax will usually apply.
The deemed disposals above take place where a person becomes entitled to the trust assets under the terms of the trust or when a life interest ceases on the death of the person entitled, but the assets do not cease to be in the trust entirely. A beneficiary may become absolutely entitled to the assets or part of the assets where, for example, they are appointed or transfer to him under a discretionary trust. Equally under the terms of the trust he may become entitled at a particular age or subject to satisfying particular conditions.
In the above cases, there is deemed to be a dual disposal by both the trustees and the beneficiary respectively. Where the person becomes entitled to the assets on the occasion of a death and the trust thereby ends the trustees are deemed to reacquire the assets at market value at the date of death. This parallels to provisions in relation to capital gains tax on death where no settlement is involved.
Disposal of Trust Interest by Beneficiary
Where the beneficiary disposes of an interest which he acquired without payment from the trustees (e.g. an interest in the trust /settlement (including an annuity or life interest or reversionary interest)) , there is no capital gains tax disposal, provided certain conditions apply. No chargeable gain accrues on the disposal of an where the disposal is by the original beneficiary, or a person who acquired the interest from the original beneficiary otherwise than by purchase.
The purchaser of an interest (or a person deriving an interest from a purchaser) is chargeable on a gain made –
- on disposal of the interest by the purchaser (or such person), or
- on the purchaser (or such person) becoming absolutely entitled as against the trustee to the property, the consideration for the disposal being the market
value of the property as diminished by any CGT charged on the trustee in respect of the property.
Death and Personal Representatives
There are several situations where the law deems there to be a trust. Where a person dies, a grant of probate of his will or letters of administration to his estate may issue in favour of personal representatives.
The personal representatives give effect to the terms of the will or the entitlements under the rules of intestacy. They may have elements of choice as to how they do so. They may, for example, distribute some assets in their actual state or alternatively may sell them and distribute the proceeds as cash.
More complex wills themselves provides for trusts and settlement. The trustees may be separate persons or may be the same person as the personal representative. In this case upon completion of administration of the assets i.e. upon their being realised or decided to be held as they are, the assets may cease to be held by the personal representatives and become held by them in their capacity as trustee. From then on the rules regarding trustees will apply.
CGT & Death
Where assets are acquired on death, special capital gains tax rules apply. Critically the assets are deemed to be acquired by the personal representative at the market value on the date of death. The beneficiary is deemed to acquire the assets at the same time as the personal representative i.e. at the date of death at market value.
When assets are acquired and passed onto a beneficiary there will generally be no capital gains tax payable by the personal representative. The beneficiary is deemed to acquire the personal representative at market value.
Therefore capital gains tax has the very valuable advantage of uplifting values to the date of death without a consequent charge to capital gains tax. In effect inheritance tax is the principal charge.
The personal representatives have obligations in respect or pre-death capital gains tax. They must make outstanding returns. There is terminal relief available against losses occurring in the year of death which may be set back in respect of gains in the previous three years with potential for repayment.
Personal representatives are treated as being a single body of persons.Therefore where further personal representatives are appointed or substituted parties they will continue to be regarded as if they were a single entity.
Where assets are transferred by way of security there is no disposal. If however the lender enforces as mortgagee he is deemed to sell the assets as nominee of the borrower. There are special provisions which oblige the nominee to ensure capital gains tax is paid. See our separate section in relation to the taxation of enforcement of security.