Trusts: narrowing options for optimising tax

Termination of tax-free upwards revaluation removes key tax advantage


Trusts and private foundations (asset management foundations) have been providing a regulated framework for wealth planning and long-term, tax-efficient asset management for a number of years now (for trusts since the new Hungarian Civil Code entered into force in 2014, and for private foundations since 2019). However, one of the most important of the many tax benefits of trusts, tax-free upwards revaluation, will be removed by the spring tax law amendments.

What are trusts?

A trust contract means a settlor, i.e. the owner of the assets, transfers to the trustee assets, rights and claims that the trustee then holds in his own name, but on behalf of the beneficiary (usually the settlor and his family). Although the legal structure is slightly different, private foundations achieve their purpose through similar partial independence of the assets they hold from the founder.

From a tax perspective, trusts and private foundations are relatively popular investment structures because they allow for the integration of certain assets into tax- and duty-free frameworks during the settlement.

Current rules of trusts 

Under the present system, there are basically two types of asset settlement structure with regard to valuing the assets involved:

  • transfer of the assets concerned at their acquisition value, or
  • settlement of assets at market value (upwards revaluation).

Why does it matter what value is placed on each asset when creating the trust or private foundation?

From a tax point of view, the crucial difference occurs when the trustee or private foundation sells the given asset (e.g. a share in a limited liability company) and distributes the proceeds of the sale to the beneficiary (disposition of assets). For example, if a share in a limited liability company that is given to a trust or a private foundation during the settlement for HUF 10 million is then sold for HUF 150 million, the tax liability of a private beneficiary is based on the difference between the two amounts, i.e. HUF 140 million. However, if the settlement for the share in the limited liability company is based on its market value at the time, for example HUF 100 million, the tax liability for the HUF 150 million proceeds from the sold share in the limited liability company is only calculated on the difference of HUF 50 million.

Under the current provisions of the Act on Personal Income Tax, an individual who transfers assets to a trust or private foundation is not liable to pay tax on the transfer of the assets either at acquisition value or in the case of a settlement revalued to market value.  

What is changing?

The example above clearly shows that among trust structures, the upwards revaluation option can generate significantly higher after-tax income than if the assets concerned were transferred at their acquisition value. This is precisely where the legislator intervenes with an amendment to the law, by removing the possibility of tax-free upwards revaluation. The new legislation does not amend the rules on the tax liability arising when disposing of assets, but imposes a special tax liability when creating the structure, for the asset settlement (i.e. when the settlor, the founder in the case of a private foundation or any joining private individual places their assets in trust or transfers them to the private foundation).

If there is any upwards revaluation on the transfer of an asset (i.e. the accounting value of the asset exceeds its historical acquisition cost), this generates taxable income for the settlor or founder. If there is no upwards revaluation at the time of the transfer, there is of course no taxable income at the time either.

Other amendments

Furthermore, based on the amendments to the bill that have been proposed in the meantime, a further change will introduce the obligation to report the value of the asset settlement to the NAV, while a three-year tax deferral option has also been added to the regulation. The tax package was adopted by the Hungarian Parliament on 4 July, the amendments related to trusts and private foundations will enter into force on the 60th  day after the promulgation.

Although the amendments will undoubtedly remove a major tax benefit of trusts and private foundations, there are still a number of tax advantages associated with settling assets without upwards revaluations that may make it worthwhile choosing these forms of long-term wealth planning.

If you need an expert on trusts or other tax planning tools and tax optimisation solutions, our tax advisers will happily advise you. Feel free to contact us.

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