How is Income in the Hands of a Beneficiary of a Discretionary Trust Taxed?

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| Lisa Cosgrave

Where the trustees have the power to accumulate income, they are subject to income tax while the income remains within the trust. An additional 20% surcharge under s805 TCA 1997 may arise on such undistributed income. This is similar to the close company surcharge in that if it isn't distributed within 18 months the undistributed trust income is subject to the 20% surcharge.

Any income which has already passed through and been taxed in the hands of trustees is subject to income tax under Schedule D Case IV in the hands of the beneficiary on receipt as it is “taxed income” (s59 TCA 1997). The trustees should provide the beneficiary with a form R185 (which shows the 20% tax paid by them) and the beneficiary will then receive a credit for the tax paid.

The beneficiary should consider whether the receipt of this income renders him/her a “chargeable person” for the purposes of s959A TCA 1997 see Tax & Duty Manual Part 41A-01-01.

Under section 959A TCA, a chargeable person for self-assessment purposes is a person who is chargeable to tax on that person’s own account or on another person’s account in respect of a chargeable period. Section 959B, which contains a number of exceptions to the general rule in section 959A, provides inter alia that an individual is not a chargeable person for a tax year where, for that year, she or he is in receipt of:
· PAYE income only, or
· PAYE income and income from non-PAYE sources (e.g. trading income, rents, dividends, deposit interest), where the total non-PAYE income assessable to tax 
o does not exceed €5,000 (€3,174 for 2015 and prior years), and
o is taken into account in determining the individual’s tax credits and standard rate cut-off point, or
o is taxed at source (for example, deposit interest subject to DIRT)

For the purposes of section 959B(1)(a), Revenue may, in considering whether non-PAYE income should be taxed under the PAYE system, take account of an individual’s gross income from non-PAYE sources. In this regard, an individual whose gross non-PAYE income from all sources exceeds €30,000 (€50,000 for 2015 and prior years) is regarded as a chargeable person notwithstanding that his or her assessable income from non-PAYE sources does not exceed €5,000 (€3,174 for 2015 and prior years).

CAT may also apply where a beneficiary receives an income payment from the trust. CAT is payable by the beneficiary when they receive benefits or distributions from a trust. The donor for CAT purposes is the settlor of the trust. The usual CAT thresholds, reliefs and exemptions can apply (for example spousal exemption, small gift exemption or relief under s. 82(2) CATCA 2003 for support, maintenance and education). The territoriality provisions of s. 6 and s. 11 CATCA 2003 should also be considered.

Whilst there is no statutory provision to offset the income tax paid against the CAT, in practice CAT will be payable on the net income receivable. So for example if the beneficiary receives a distribution of 100k pays income tax (assuming a marginal rate of 52% for ease) of 52k, the net income is 48k which would be subject to CAT AT 33% (assuming the threshold is fully utilised in this case) resulting in a CAT liability of €15,840.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.

If you require assistance or advice in relation to any of the above matters, please contact our team on 053 91 000 00 or email [email protected].

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About the Author

Lisa is a key member of our tax technical support team, providing advice on all tax heads in response to queries submitted. In addition, she provides support within the tax department on company/business valuations, tax planning, restructuring and exit planning solutions for a range of clients, liquidations, and company secretarial issues. She also has experience in financial reporting and audit. A Chartered Certified Accountant and Chartered Tax Advisor, Lisa trained and worked in practice for six years prior to joining OmniPro, where she gained experience in financial reporting, tax compliance across all tax heads and audit. She has experience with a range of small and medium sized businesses assisting them with their financial reporting obligations and tax compliance across all areas

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