What Is A Discretionary Trust?
A Discretionary Trust (DT) is a Trust set up by a settlor who, in lieu of appointing trust property directly to beneficiaries, gives the trust property instead to trustees, with the power to appoint the property out of the trust fund amongst a particular class of persons as they see fit.
The Trust neither specifies the time at which the appointments should be made, nor the amount to be paid out to any particular beneficiary.
5 Irish Taxation Issues To Consider for DTs
1. Irish Income Tax (IT)
The residence of a DT for IT purposes depends on the residence of the individual trustees. Any income which arises to an Irish resident DT is subject to Irish IT. The trustees are chargeable at the standard rate of tax (i.e. 20%). IT reliefs available to trustees are limited and, in particular, no allowance is granted in respect of the costs of administering the DT.
A further IT surcharge of 20% applies on income arising to the trustees. This additional surcharge will not apply if the income is distributed by the trustees to the beneficiaries within 18 months of the year in which it arises.
2. Irish Capital Gains Tax (CGT)
A DT is liable to Irish CGT if the trustees are resident in Ireland or, if not resident, they dispose of specified assets.
Trustees are deemed resident and ordinarily resident in Ireland for CGT unless:
- The general administration of the trust is ordinarily carried on abroad; and
- The trustees or a majority of them are not resident or not ordinarily resident in Ireland.
Therefore, the trustees may be liable to CGT on actual disposals of assets during the course of administering the DT and on capital appointments out of the DT to the beneficiaries.
3. Irish Stamp duty (SD)
Acquisitions of certain assets by the DT will give rise to SD issues for the DT.
Appointments of property out of the DT to the beneficiaries in certain circumstances should not give rise to SD.
4. Irish Discretionary Trust Tax (DTT)
DTT arises where the person who establishes the DT has died and if all the beneficiaries are over 21 years of age. The charge arising has two elements, a ‘once off’ 6% charge and a second ‘annual charge’ of 1%. The once off charge is reduced in half to 3% if all the assets are appointed out within five years of it having arisen.
5. Irish Capital Acquisitions Tax (CAT)
CAT only arises when a person becomes beneficially entitled in possession to a benefit. Therefore, no claim for CAT can arise on the initial settlement of property on a DT nor will any additions to the DT give rise to CAT.
CAT can arise when an appointment is made out of a DT to the beneficiaries.
There are Irish taxation issues that require consideration but a DT remains a very flexible structure that can be used to transfer property and assets to the next generation.