In our current blog, we examine the tax implications for beneficiaries of foreign trusts.
Here are a number of examples:
- A US resident and domiciled individual settles €5 million in a trust for his child. He has never been resident in Ireland
- The trust is irrevocable and the settlor has no entitlement to any benefit from it, i.e. he has no interest in the trust
- The settlor is not a trustee
- All of the trustees are US resident
- The beneficiary is resident in Ireland but remains US domiciled
- Since it was set up the trust has accumulated income of €500,000
- The trust has also made a capital gain of €300,000 on the disposal of an asset
- The trustees have paid €700,000 to the beneficiary
- The beneficiary has received no prior benefits from parents
The Tax implications are as follows:
On the receipt of the capital sum of €700,000, the beneficiary will be liable to Income Tax on the payment up to the limit of the income earned by the trust i.e. 500,000.
This is because they are resident in Ireland ref S807A TCA 1997.
This is taxable under Case IV of Schedule D. This means that the remittance basis cannot apply.
The Income Tax liability will be:
S579A would attribute €300,000 to the beneficiary because they have received a capital sum. However, this requires the beneficiary to be Irish domiciled. It would not apply to the US domiciled beneficiary.
In filing Irish Income Tax returns the beneficiary should always claim US domicile.
Capital Acquisitions Tax
The benefit will also be taxable as a gift for Capital Acquisitions Tax. There is no statutory relief for Income Tax charged under S807A. By concession Revenue will allow a deduction for the Income Tax charge in calculating he CAT liability. This is not as good as a tax credit.
CGT on the same event
S104 CATCA allows credit against CAT for CGT charged on the same event e.g. a gift being a disposal by the giver.
However, in this case of the gain by the trust and the payment to the beneficiary, are not the same event so the CGT could not be offset.
The CAT liability will be:
Total Tax Paid
The total tax payable in the year will be:
As you can see with the example above, care must be taken to make sure all the relevant tax heads are taken in to consideration.
It would be easy to miss the C.A.T. implications shown in the example above.
Please feel free to contact us if you have any queries regarding these examples, or indeed, if you require any tax advice.
We are tax advisors for accountants