Important changes to discretionary trusts

Changes to discretionary trusts are coming into effect on the 31st of December 2020 which may expose trustees to foreign surcharges.

Background

A surcharge rate on purchaser duty and land tax has applied to a "foreign person" in respect of residential land owned by discretionary trusts since 2016. Previously, taxpayers holding land in discretionary trusts could avoid the surcharge by not including foreign persons as beneficiaries.

Now, all trustees, beneficiaries and potential beneficiaries will be assumed to be a 'foreign person' unless changes are made to the deed.

What are the changes?

Trustees of a discretionary trust that has acquired residential land will be deemed a foreign person unless the trust deed specifically outlines that:

• no foreign person can be a potential beneficiary, and
• the trust cannot be amended to allow a foreign person to become a potential beneficiary in the future.

If the terms have not been amended to irrevocably exclude foreign beneficiaries in your discretionary trust by the 31st of December 2020, the trustee will be liable for the following foreign surcharges (in addition to ordinary rates), such as:

• 8% surcharge rate of duty on dutiable transactions involving residential land that have occurred prior to 31 December 2020; and
• 12% surcharge land tax in respect of the 2017, 2018, 2019 and/or 2020 land tax years.

Testamentary discretionary trusts which do not prevent a foreign person from being a beneficiary will also be subject to foreign surcharges if the will or codicil is executed after 31 December 2020.

What action do I need to take?

If you have a discretionary trust in place which owns land, Donovan Oates Hannaford are ready to assist with amending your trust to exclude foreign beneficiaries from the class of beneficiaries.

Contact Donovan Oates Hannaford today if you require legal support in relation to the above topic.