Many clients with a real estate portfolio choose to create discretionary testamentary trusts (DTTs) in their Wills in order to pass the benefit of the portfolio on to their children. The DTT structure has many taxation benefits; however, it is also worth considering the land tax implications of the Trust when deciding whether to include one in your Will.
Stages of taxation
After the death of the Deceased, the State Revenue Office (SRO) allows a three-year period for the Estate to be administered. During this phase (the ‘concessionary period’), when the Executors of the Estate are ‘calling in’ the assets of the Deceased and placing relevant assets in the DTT, the normal land tax regime applies to the Deceased Estate. This means that the Deceased’s Principal Place of Residence (PPR) is exempt from land tax, as it would be for a living person, and any additional properties are taxed at the ordinary land tax rate.
Once the three year period has expired (or once the administration of the Estate has been completed and the Trust has ‘kicked in’), the Trustee of the DTT is deemed as the ‘owner’ of the land for land tax purposes. Additional properties therefore attract land tax, which is calculated at a surcharge rate. Such land tax will be a Trust expense to be paid each financial year by the Trustee with pre-distribution funds and not an expense to be borne by beneficiaries. Please note that some exceptions may apply for property acquired by a DTT pre-2006; however, these will not apply to clients who are making their Wills now.
Can I avoid paying a surcharge on Trust properties?
For land acquired by a DTT from 2006 onwards, the only way to avoid attracting the surcharge rate of land tax is if a beneficiary is using a Trust property as their PPR. The Trustee needs to make a nomination of that beneficiary to the State Revenue Office for that year and as a consequence the beneficiary will not pay any land tax on the PPR. The Trustee will still pay land tax on that property but at ordinary rates. A PPR may be an attractive option for Trustees to reduce the tax burden on the Trust, but the decision to nominate a PPR beneficiary will also depend on other factors, including:
- The beneficiary must be genuinely occupying the property as their PPR. This may reduce a stream of income for the DTT which the renting out of the property would otherwise generate. Accordingly the Trustee must consider whether the land tax benefit of the PPR beneficiary nomination outweighs the benefit of using the property as a Trust investment.
- If there are multiple beneficiaries of a Trust, allowing one beneficiary to occupy a Trust property as a PPR may confer a disproportionate benefit to them over other beneficiaries.
- If a Trust property is nominated as a beneficiary’s PPR, and that beneficiary subsequently becomes embroiled in family law proceedings, such property may be taken into account as a ‘financial resource’ of the beneficiary. Whilst the Family Court cannot ‘reach into’ the Trust to transfer that property to a former spouse as part of the property settlement, the Court may decide to grant fewer assets to the beneficiary in occupation of the property as they would have that PPR to ‘fall back on’.
A complete exemption to land tax only applies for specific types of Trust, such as a life interest in a PPR, and not to a DTT broadly.
Ultimately, the benefits of a DTT are ample and it will be an effective structure for many clients. Land tax is but one factor to take into consideration when determining the best structure for your Will. If you are considering a Will with a DTT, or you don’t know where to start with your Estate Planning, contact our team today to arrange a no-obligation appointment. Our experienced solicitors can guide you through the Estate Planning process including advising you on taxation issues.