579 Non-resident trusts

Summary

Sections 579 to 579F address the capital gains tax position of trusts and their beneficiaries where the trust is “off-shore”, becomes “off-shore” or ceases to be subject to Irish capital gains tax in respect of settled property because of double taxation relief treaties.

This section is designed to prevent the avoidance of capital gains tax by a person who is either resident or ordinarily resident in the State through the device of putting assets into non-resident trusts. A beneficiary of a trust so created who is domiciled and either resident or ordinarily resident in the State is chargeable on his/her proportionate share of capital gains made by the trust. In the case of a trust set up before 28 February 1974 (the date of issue of the Government White Paper on capital taxation), the provision does not apply where the beneficiary’s interest is in income only and he/she cannot obtain any part of the capital of the trust. Where a beneficiary has a reversionary interest in capital, payment of any tax charged under the section may be postponed until he/she becomes entitled to the property or disposes of part or all of his/her interest.

Details

Application

(1) The section applies to chargeable gains accruing to a settlement the trustees of which are not resident and not ordinarily resident in the State if the settlor or one of the settlors is either resident or ordinarily resident in the State, or was either resident or ordinarily resident in the State when he/she made the settlement.

Taxation of beneficiary

(2)(a) A beneficiary under such a settlement who is domiciled and either resident or ordinarily resident in the State is to be taxed on his/her proportionate share of any gains accruing to the non-resident trustees. The measure of the chargeable gains accruing to the trustees is the amount of the gains which, given the same facts and circumstances, would have been treated as accruing to them if they had been domiciled and either resident or ordinarily resident in the State. In determining chargeable gains, allowable losses are to be taken into account.

(2)(b) Where a beneficiary under a settlement was neither resident nor ordinarily resident in the State in a year of assessment during which a gain accrued to the trustees, but was so resident or ordinarily resident in an earlier or subsequent year of assessment, the gain which would have accrued to that beneficiary if paragraph (a) had applied will be treated as accruing in the first year of assessment in which that beneficiary subsequently became resident or ordinarily resident.

(2)(c) Where a person was excluded as a beneficiary under the settlement for a period of time but was subsequently included as a beneficiary of that settlement and a gain accrued to the trustees during a year of assessment when that beneficiary was so excluded, a gain which would have accrued to the beneficiary if paragraph (a) had applied will be treated as accruing in the first year of assessment in which that person was subsequently included as a beneficiary of the settlement concerned.

(2)(d) If a beneficiary is not treated under paragraph (a), (b) or (c) as if any apportioned part of the gain accrued to him or her in a year of assessment and—

• (i) the trustees have earlier realised a chargeable gain, and
• (ii) the beneficiary receives a capital payment within the meaning of section 579A(1) from the trust during a year of assessment in which he or she is either resident or ordinarily resident in the State,

then the beneficiary will be treated as if an amount equal to—

• (I) the capital payment, or
• (II) the apportioned gain which would have accrued to him or her if paragraph (a), (b) or (c) had applied,

whichever is less, were a chargeable gain accruing to him or her in the year of assessment in which the capital payment is received.

(2)(e) The proportionate share of a beneficiary is to be determined in such manner as is just and reasonable between persons having interests in the settled property according to the respective values of their interests in the settled property according to the respective values of their interests, whether for life or in reversion. In valuing an interest, no account is taken of the possibility that the interest may become worthless on the happening of a contingent event. Such a provision might be included in the settlement in order to avoid the provisions of section 579.

Valuation of interests in discretionary trusts

(3)(a) The rules for valuing interests in a trust which depend on the exercise of discretion are set out. There are 2 types of case. The first is where the discretionary interest is in income and, in this case, the average of the income received by the exercise of the discretion in the 5 years ending with that in which the chargeable gain accrues is treated as if it were an annuity for the period of the trust (or for the period of expectation of life of the beneficiary) equal to that average amount and the discretionary interest is to be valued accordingly.

(3)(b) [This paragraph was deleted by section 66 of the Finance Act 2012 as respects disposals made on or after 8 February 2012.]

Pre-28 February, 1974 trusts

(4)(a) The rules relating to non-resident trusts are modified in relation to trusts created before 28 February, 1974. The first modification is that a beneficiary of such a trust is not chargeable under subsection (2) if his/her interest is in income only and he/she cannot obtain for himself or herself any part of the capital of the trust.

(4)(b) The second modification is that, in the case of a beneficiary with a reversionary interest in capital who cannot obtain any part of the capital at an earlier date, payment of the tax may be postponed until he/she becomes absolutely entitled to the property or disposes of his/her interest in whole or in part.

For the purposes of subsection (4), the addition of property to a settlement after the settlement is made is to be treated as a new settlement.

Payment of tax by trustees

(5) If the trustees of a non-resident trust pay the tax on chargeable gains apportioned to a beneficiary under the section, that payment is not to be treated for the purposes of income tax or capital gains tax as a payment to the beneficiary.

Losses accruing to trustees

(6)(a) If the trustees of a non-resident trust make a capital loss, that loss is not to be apportioned to a beneficiary. Losses of the trust are set off against gains of the trust in determining the amount to be apportioned between beneficiaries. If in any year of assessment such losses exceed the gains, the excess is available for set-off against gains of a subsequent year in computing the net gains of that year for apportionment.

(6)(b) The section will not apply where it is shown in writing or otherwise to the satisfaction of the Revenue Commissioners that, at the time when the capital gains tax charge arises, the settlement is carrying on genuine economic activities in a relevant Member State (within the meaning of section 806(11)(a)) which includes the United Kingdom.

[It should be noted that section 917 empowers the Revenue Commissioners to request beneficiaries to supply information about non-resident trusts and their chargeable gains.]

Relevant Date: Finance Act 2021