Overseas beneficiaries and trustees – triggers for foreign tax surprises

By Lee Harris - 22 Jul 2022

Inland Revenue will share relevant information with foreign tax authorities when they identify a foreign taxpayer, and the foreign tax authorities reciprocate. Tax authorities will also assist each other to recover taxes owing[1].

When a trustee or a beneficiary lives overseas, or when a foreign debt is incurred overseas (such as a loan), foreign laws and taxes will usually apply. This is because most countries tax trusts based on the residence of the trustees, and most countries also tax capital gains on assets and benefits enjoyed by their taxpayers. On the other hand, New Zealand taxes trusts based on the residence of the settlor. The difference in the way trusts are taxed in different countries has significant tax implications.

Some examples as at 2022:

Australia

Australian residents are taxed on their worldwide income and on capital gains from the disposal of most assets. Capital gains are taxed at income tax rates.  The top Australian income tax rate is currently 45%, with an additional Medicare levy of 2%.

Trustee becomes an Australian resident:

The event of a New Zealand trustee of a New Zealand trust relocating to Australia will trigger the starting date for the capital gains tax period, extending Australian taxation rights over capital gains to the trust's worldwide assets. This includes all New Zealand located assets.

By way of example, if the trust asset includes real estate or a share portfolio (irrespective of the country), when the asset is sold or disposed of in the future, the gain is subject to capital gains tax in Australia. If that gain is $100,000, the tax payable in Australia could be $47,000.

Any New Zealand house rental income for the trustees would also be subject to tax in Australia.

Loan to an Australian resident beneficiary

A loan to an Australian resident beneficiary will be treated as taxable income in the hands of the beneficiary pursuant to section 99B of the Income Tax Assessment Act 1936. Income tax payable by an Australian beneficiary on a loan of $200,000 could be up to $98,000.

United Kingdom

In addition to capital gains tax, the United Kingdom charges inheritance tax upon death.  The UK tax system is complex and extensive.

Beneficiaries

Loans and distributions made to a UK beneficiary can be subject to UK tax, including income tax at a rate of up to 45% and capitals gains tax.

A loan to a UK beneficiary enabling the beneficiary to purchase UK real estate is treated as a UK asset.

Assets

Trustees are required to pay a charge on every 10-year anniversary of the date the trust was set up if it holds relevant property with a value above the Inheritance Tax threshold. The reason for the on-going 10-year charges is to ensure assets in a trust structure cannot escape inheritance tax.

France

France is notorious for her taxes, and she doesn't disappoint when it comes to trusts.  French civil law also gives bloodline relatives specific forced heirship rights that cannot be contracted out of.

Trusts are generally viewed by the French authorities as tax evasion vehicles. They are ignored for the purposes of taxes, meaning the settlor is treated as still owning the assets, and, upon the settlor's death, all beneficiaries are deemed to automatically become owners of the trust assets.

Since 2011, France requires details of any trust to be reported to it whenever one of the following situations is present:

• One beneficiary is a French tax resident
• One settlor is a French tax resident
• One trustee is a French tax resident
• French assets are present in the trust.   French assets include a loan to a French resident.  There is no requirement for the borrower to be a beneficiary of the trust.

Reports are required within one month of any economic activity taking place (such as a distribution to a beneficiary or the addition of a new asset to the trust), and there is also an annual report required.  The reports are prepared in French and the sums converted to Euros.

Here are key examples of why expert assistance is needed whenever a trust or estate planning has any French connection:

• If any of the French trust reports is missed, the penalty is €20,000 for each late report, with further penalties of 80% if there were French taxes due
• Due to recent changes in France, forced heirship can apply to French assets, irrespective of the laws applicable to the parties.   This can disrupt estate planning considerably
• If a French beneficiary becomes liable for inheritance tax as a result of the settlor's death, the obligation exists even if they never receive a distribution
• French wealth tax includes French real estate assets held in a trust. Real Estate extends to investments in a property fund, real estate held through a pension plan, life assurance policy or other schemes/ entities.
• If a French resident beneficiary is entitled to receive a distribution or an inheritance, it will need to be declared in France and will be subject to either income tax, transfer tax or inheritance tax.
• Depending upon the level of bloodline connection or marriage regime, gifts without consideration can be subject to tax of up to 60%.
• Any gifts made during the lifetime of a French resident settlor will be clawed back into the calculation as at the date of death for the forced heirship calculations.

Trusts with foreign connections, wills involving foreigners or foreign assets, court proceedings involving more than one jurisdiction are some of the areas where specialist legal advice has made a significant difference for our clients.

If you are affected by foreign connections, don't delay finding out what the implications are. Your children won't thank you if they find that almost half of assets earmarked for them end up being used for foreign taxes.

Whenever asset planning or transactions involve more than one country, specialist advice is not something you should try to economise on. Cross-border matters are involved, but the cost can quickly pale when compared with the tax.

Contact:

Lee Harris