Special Trusts Permanently Incapacitated Individuals

Special trusts for permanently incapacitated individuals

Introduction

Section 189A TCA 1997 (inserted by Section 12 FA 1999) provides certain exemptions from income tax for:

• The trustees of trusts which are established with funds raised by public subscriptions for the benefit of permanently and totally incapacitated individuals
  and
• The incapacitated individuals in respect of payments made by the trustees of such a public subscription trust to or for their benefit.

The section is applicable for 1997/1998 and subsequent years of assessment.

This article sets out the main features of the exemption.

Conditions of Exemption

Qualifying Trust

To qualify for relief a trust established by deed has to satisfy the following:

• The trust must be created exclusively for the benefit of one or more than one named incapacitated individual (see below) for the duration of the life of that individual or the lives of those individuals, as the case may be.
• The trustees hold trust funds which:
  • are to be applied for the benefit of the named incapacitated individual or individuals,
    and
  • in the event of the death of the incapacitated individual or individuals, the undistributed part of the trust funds are to be applied for charitable purposes or are to be appointed in favour of the trustees of other charitable bodies.
• None of the trustees are connected with the incapacitated individual or individuals.

Incapacitated Inividual

An incapacitated individual means an individual who is permanently and totally incapacitated, by reason of mental or physical infirmity, from being able to maintain himself or herself.

Trust funds

The funds in a qualifying trust can consist of the following:

• Public subscriptions raised on behalf of the incapacitated individual or individuals for whose benefit the trust was created

If a couple are assessed under the provisions of Section 1017 TCA 1997 (aggregation basis), the “sole or main” test should be applied only to the income of the incapacitated spouse, and not to the aggregated income of both spouses in determining if exemption is due.

The exempt income is not to be taken into account in computing total income for tax purposes.

Requirement to make a return

Notwithstanding the exemptions provided, returns of total income must be made. This means that the exempt income must be shown on the returns made by the trustees and the incapacitated individuals.

Deposit Interest Retention Tax

• All moneys and other property derived directly or indirectly from such public subscriptions. This would include secondary investments (e.g. deposit interest) and secondary investment income (e.g. rental income).

Public subscriptions

Public subscriptions mean subscriptions raised following a public appeal and either of the following conditions are met:

• The total subscriptions raised are ₤300,000 or less
  or
• The subscriptions, at any time on or after the return date for the period in which the exemption is first claimed, do not contain a subscription made by any one person which exceeds 30 per cent of the total subscriptions raised.

There is thus no upper limit put on the quantum of funds that can be raised by public subscription. However, if the subscriptions exceed ₤300,000 no single person may contribute more than 30 per cent of the total amount of the subscriptions.

Income covered by the exemption

The exemption covers:

• Dividends and income arising to the trustees which otherwise would be chargeable to tax under Schedule C or under Case III, Case IV (in circumstances where tax has been deducted at source under Section 59 TCA 1997 and under Section 745 TCA 1997 where tax has not been deducted at source) or Case V of Schedule D, or Schedule F.
• Income arising to the incapacitated individual in respect of payments made by the trustee, together with income arising from the investment of payments made by the trustees out of the trust fund and consisting of dividends or other income chargeable to tax under Schedule C or Cases III, IV or V of Schedule D or Schedule F. The exemption under Case IV covers income from which tax has been deducted at source under Section 59 TCA 1997 and income from which tax has not been deduced at source under Section 745 TCA 1997.

The exemption, in the case of the individual, only applies where the payments made by the trustees and dividends or other income referred to above are the sole or main income of the individual. “Sole or main” means more than 50 per cent.

If the incapacitated individual is in receipt of an invalidity pension or benefit payable by the Department of Social, Community and Family Affairs, and the individual’s injury or disability which gave rise to the payment of the benefit/pension by that Department is the same injury or disability for which the public appeal was made and the special trust established, then that benefit/pension will not be taken into account for the purposes of determining whether the investment income is the sole or main income of the individual.

Repayment of appropriate deposit interest retention tax (DIRT) can be made to trustees of trusts which qualify for exemption from tax under Section 189A TCA 1997 in respect of interest arising from the investment of the trust funds which is paid on or after 6 April 1997.

The incapacitated individual who is entitled to exemption under Section 189A TCA 1997 can claim a refund of deposit interest retention tax attaching to such income even though the relevant interest does not form part of his/her total income.

Dates applicable

The exemption applies for 1997/98 and subsequent years of assessment even where the public subscriptions were raised or the qualifying trusts were established by deed prior to 6 April 1997.

Claims under the Section

As noted above, the trustees and the individual are required to submit annual returns of income. When a claim under the section is first made the following documentation should be submitted to the tax office:

• A medical certificate stating the cause, nature and extent of the infirmity, and the nature and extent of the individual’s incapacity
• Copy of the trust deed
• A declaration from the trustees confirming that the conditions regarding “public subscriptions” Contained in Section 189A TCA 1997 and which are referred to above, are met.