New tax guidelines – Immovable property settled on trust

The Maltese Inland Revenue recently published two Tax Guidelines providing an interpretation as to when immovable property can be deemed to have been settled on trust for Maltese income tax and stamp duty purposes.

These interpretative Guidelines were necessary since Article 32B(1)(f) and 32C of the Duty on Documents and Transfers Act (the “DDTA”) and Article 5 and 5A of the Income Tax Act (the “ITA”) refer to situations where the immovable property itself is settled into the trust. No specific mention is made in the ITA or DDTA of typical scenarios where cash is settled by the Settlors or through a loan to the Trustee, and the cash is then used by the Trustee to acquire the immovable property.

Thus, the existing provisions in the ITA and DDTA could have possibly been restrictively interpreted in a manner which would put a number of family trusts in a worse-off position when compared to a situation where immovable property is not acquired through a trust.

The Inland Revenue has ensured through the publication of these Tax Guidelines that there would be the same fiscal effect irrespective of whether immovable property is acquired by individuals or by certain family trusts set up for the benefit of family members.

Income Tax Guideline

The Inland Revenue has clarified that immovable property would be deemed to have been settled on trust for purposes of the ITA if all the following conditions are satisfied:

  1. monetary amounts (rather than the immovable property itself) were settled into the trust with the sole purpose of enabling the trustee to acquire immovable property, whether or not identified at the time when the amount is settled into the trust; and
  2. the immovable property was subsequently acquired by the trustee within a period not exceeding two (2) years from the date of settlement of the relevant monetary amounts utilised for the payment of the acquisition price of such property; and
  3. the immovable property is acquired by the trustee for the purpose of making it available for use by one or more of the beneficiaries of the trust as their sole, ordinary residence in Malta; and
  4. the beneficiaries of the trust have an irrevocable vested right to receive the immovable property acquired by the trustee; and
  5. the relevant trust instrument specifically provides that the beneficiaries of such trust comprise only family members referred to in article 5(2)(e)(i) of the ITA, whether they are in existence or not at the time of such settlement, in relation to the settlors, such persons being either alone or with the settlors themselves; and
  6. the beneficiaries shall be persons who are in existence at the time of the settlement of the monetary amounts settled into the trust and utilised by the trustee for the acquisition of the immovable property; and
  7. the trustee provides a statement to the Commissioner indicating the name and identification document of the beneficiaries of the trust and a description of the immovable property acquired or to be acquired by the trustee for the benefit of such beneficiaries.

Thus, although the immovable property would have been acquired by the trustee rather than by the settlor, the property so acquired would still be deemed to have been settled on trust by the settlor. This would result in a neutral tax treatment on any distributions of the property by the trustee to the settlor’s children or other qualifying family members of the settlor following the settlor’s death. Furthermore, the interpretative Guidelines enable the cost of acquisition of the property acquired by the trustee to be calculated in the same manner as if the settlor would have acquired such property in the first place.

Stamp Duty Guideline

The second Guideline clarifies that:

  • where immovable property is distributed by trustees to a beneficiary of the trust, and
  • the trustees had paid duty in accordance with article 32 of the DDTA when they had acquired such immovable property,

the immovable property shall be deemed to have been initially transferred by the settlor to the trustees for the purposes of article 32B(1)(f) of the Act.

Any subsequent distributions of the trust property which was so acquired by the trustee and which is distributed to the beneficiaries would therefore result in stamp duty being limited to the increase in value of the property from the date when it was acquired by the trustee and its value at the time of the distribution.

This article does not constitute tax advice which can be relied on by any person. If any specific tax advice is required, please contact Dr. Stephen Attard.