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Discretionary Trusts: 5 Irish Taxation Issues To Consider


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

discretionary trusts   5 irish taxation issues to consider

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. 

In Summary

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.

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It looks as though the Irish Revenue dislike DTs almost as much as the UK does. A good halfway house is, of course, the Isle of Man, where there is no capital gains tax or inheritance tax/CAT and where no tax is chargeable on income unless there are IoM resident beneficiaries (or certain IoM source income).
Posted @ Tuesday, June 28, 2011 7:21 AM by Richard Sowler
Mr Sowler, 
Thank you for your comments. 
It is very interesting to note the tax advantages associated with an Isle of Man ("IOM") Discretionary Trust. It appears to be a very flexible structure that can be used to transfer non IOM assets to non IOM beneficiaries in a tax efficient manner.
Posted @ Wednesday, June 29, 2011 9:35 AM by Pearse Trust
Perhaps the Irish version has a real advantage over its English equivalent in that the IHT/DTT initial and annual charge differential is significant and the Irish régime allows a reduction in the initial charge where the assets are appointed out, I would assume an interest in income appointed, within 5 years of constitution or death. Perhaps an English domciled settlor coudl settle an Irish discretionary and have the initial and 10 year IHT charge disallowed under article 63 TFEU as an impediment to the free movement of capital! Needs an opinion perhaps ....
Posted @ Tuesday, July 19, 2011 3:00 AM by Peter Harris
Is a Discretionary Trust the best way to put a Farmhouse and Farm in trust for my 4 children and their decendants upon my death.  
I assume it would make more sense tax-wise to give it equally to my 4 children. Would it cost much more in tax to go the Trust route?
Posted @ Thursday, February 02, 2012 8:23 AM by Lorraine Moloney
Ms Moloney 
Thank you for the comment. However if you require specific advice you would need to engage with us directly. You can contact us at info@pearse-trust.ie 
Many thanks
Posted @ Friday, February 03, 2012 11:16 AM by Pearse Trust
I want to leave my property to my 
sisters children, for them to have a place to live in Ireland. 
I do not want the land or property sold. What do I need to set up?
Posted @ Friday, November 02, 2012 1:54 PM by denis ryan
Mr. Ryan,  
Thank you for the comment. However if you require specific advice you would need to engage with us directly. You can contact us at info@pearse-trust.ie  
Many thanks
Posted @ Monday, November 05, 2012 4:03 AM by Geoffrey Dorrity
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