Taxation of trusts, settlements and estates: trustees, beneficiaries and settlors

A father dies and leaves rental property, shares and a small business to his four children. The executor collects the rent, runs the business for a year, pays his own fees, makes small payments to the children for school, and distributes part of what is left. Who pays tax on which part?

The children on what they receive, the executor on what is left in his hands, and in some cases the father’s own estate on the final year of his assets. The same questions arise when a living person puts property in trust for his family.

This topic covers the meaning of a trust, a settlement and an estate, the persons chargeable, the relevant tax authority, the basis period, significant economic presence of non-residents, allowable expenses, the computation of computed income, discretionary payments, income paid to a settlor’s infant child, accounts, payment, and offences. The previous topic covered partnerships. The next covers investment income.

Key terms in plain English

Syllabus check

This topic is in syllabus area C, personal income taxes (25% of marks). It covers:

• meaning of trusts, settlements and estates and the persons chargeable;
• the relevant authority, the basis period and the allowable expenses;
• computed income and the tax of beneficiaries and trustees.

CAMA 2020 and trusts and estates

The Companies and Allied Matters Act 2020 (CAMA 2020) is the company law of Nigeria. The sections below apply to this topic.

The rules in more depth

Definitions

A trust is an equitable obligation binding a person, the trustee, to deal with property in his custody for the benefit of persons, the beneficiaries, of whom he may be one. A settlement is a way in which the enjoyment of an estate, or part of it, is passed to another person through a disposition, trust, covenant, agreement or arrangement, for the benefit of the persons named.

An estate is the total of a person’s property, used mostly in executorships, and also means the property of a deceased person.

Other terms: a child includes a stepchild, an adopted child and an illegitimate child; a settlor includes the person who made the settlement directly or indirectly, or who provided or promised funds, or made a reciprocal arrangement for another to make it.

A will says how a person’s assets are to be distributed at death; the executor carries it out, and the court appoints an administrator if there is none. A legatee receives personal property by will, and may be specific (a named item) or residual (the remainder after specific gifts). A devisee receives real property.

A personal representative is the executor or administrator in whom the estate is vested for distribution. A life tenant has the right to the income for life, and the remainder man to the capital when the life interest ends. The administration period runs from death to the date of setting up the trust or distributing the residue.

Persons chargeable

1. The beneficiary, including an annuitant, on his share of the income.
2. The trustee or executor, on the remainder after the amounts apportioned to beneficiaries.
3. The settlor, where he can direct how the income is disposed of or who gets it.

Relevant tax authority

Where all the income of the trust or settlement for the year arises in one territory, the authority of that state. Where it arises in more than one territory, or in any other case, the federal authority. The income of a beneficiary is assessed by the authority of the state where he is resident on 1 January of the year.

Basis period and accounts

The basis period for a trustee, executor, beneficiary or annuitant is the income of the preceding year. The trustee or executor prepares accounts of income from all sources for each period ending on 31 December and to the date of final distribution. Commencement and cessation rules do not apply to trusts, settlements and estates.

Significant economic presence

Section 6(6A) of the Personal Income Tax Act, as amended in 2020, lets the Minister fix by order what is significant economic presence of a non-resident individual, executor or trustee.

For a foreign company, it arises in a year if gross turnover or income from digital activities with Nigeria exceeds ₦25 million, for example streaming or downloading, transmitting data collected from Nigerian users, intermediation platforms linking Nigerian suppliers and customers, supplying goods or services directly or through a platform, using a .ng domain, or targeting Nigerians through pricing or billing in naira.

Activities of connected persons are added together. For services of a technical, professional, management or consultancy nature, it arises where the foreign entity earns income or payment from a resident person or from a fixed base or agent of a foreign company. It does not arise on payments to an employee, for teaching in or by an educational institution, or by a foreign fixed base of a Nigerian company.

A non-resident individual, executor or trustee who gives such services to a Nigerian resident is taxed in Nigeria to the extent of the presence.

Allowable expenses and computed income

Allowed: the trustee’s or executor’s expenses, if authorised by the trust deed or will, and any fixed annuity paid from income under the deed or will. The computed income is total income less these. If the income includes profit from a trade, rent or premium, the additions and expenses are taken into account as they would be for an individual, so capital allowances are deducted.

Special points

Death of a trader. If an asset of a trade of the deceased was in use when he died, no balancing allowance or charge is made on him for that year; the estate is treated as having incurred qualifying expenditure equal to the residue on the day after death; and on a later sale a balancing charge by reference to the allowances given to the individual and to the estate.

Losses. Relieved in the normal way against computed income. A loss transferred to the estate or trust is not allowed and is added back. Losses can arise only when the trust or estate itself trades.

Discretionary payments. These are amounts a trustee may pay to beneficiaries only if the deed authorises. They are not expenses but appropriations, so they are not deducted in arriving at computed income. They are the income of the beneficiary for the year, and the net income left is apportioned. If the payments are larger than the computed income, each is reduced in proportion.

Infant child of a settlor. Income paid to or for an unmarried infant child during the settlor’s life is treated as the settlor’s income, not the child’s. It is not so treated if the total paid to the child in the year is ₦500 or less, or if the settlor is not resident or is outside Nigeria for 183 days or more.

Income that may become payable in future is treated as paid, and unallocated income is shared equally between the children who may benefit. A settlor who pays the tax can recover it from the trustee or the person who receives the income. The revenue gives him a certificate of the income and tax. Disputes on the amount are decided by the revenue, and its decision is final.

Income of the settlor. The income of a settlement is his own where he keeps an immediately exercisable general power of appointment over the capital or income, uses any of the income by borrowing or otherwise, or the settlement is revocable so that he or his spouse resumes control. A settlement is not revocable merely because assets may revert if a beneficiary dies before him, or an uncertain event happens.

Apportioning the computed income

1. If the deed or will, or the law on intestacy, divides the whole income in fixed proportions, each beneficiary takes that share of the computed income.
2. If the trustee has discretion to make payments, each payment in the year is the beneficiary’s income. The rest of the computed income is shared to those with a stated proportion.
3. The remainder, after the shares and payments, is assessed on the trustee or executor in his name. He pays the tax out of the funds of the trust or estate as agent.

Appeals and payment

An appeal against including income of a settlement, trust or estate in an assessment goes under the income tax law of the territory to whose authority the trustee or executor answers for that year (section 15). The tax on a beneficiary’s income is paid by him; the trustee pays on the undistributed remainder.

Offences and penalties

These are the same as under the Personal Income Tax Act:

• section 74 (failure to deduct or remit, 10% or ₦5,000 whichever is higher, plus the tax and interest)
• section 82 (employer’s failure, 10% a year plus interest)
• section 94 (general default ₦20,000 and ₦2,000 a day; ignoring notice, six months and a penalty equal to the preceding year’s tax; incorrect return ₦20,000 and double the tax; false statements ₦50,000 or ₦500,000, or six months)

A larger trust, with dividend and annuities

1. Gross income.
   ₦2,000,000 + ₦8,000,000 + ₦6,000,000 + (₦18,000,000 − ₦4,200,000) + ₦3,200,000 = ₦33,000,000.
2. Expenses = ₦450,000 + 2% × ₦33,000,000 (₦660,000) + ₦50,000 + ₦30,000 + ₦2,600,000 = ₦3,790,000
   computed income = ₦29,210,000.
3. Less discretionary payments ₦780,000 = ₦28,430,000. The dividend of ₦8,000,000 is franked investment income, already taxed at source, and is taken out, leaving ₦20,430,000.
4. Two-thirds, ₦13,620,000, is shared: ₦2,270,000 to each of six beneficiaries.
5. The remaining one-third, ₦6,810,000, is assessed on the trustee.
6. A beneficiary’s income is his share plus any annuity or discretionary payment: for example, the one who gets a ₦150,000 discretionary payment has ₦2,420,000, and the annuitant of ₦50,000 has ₦2,320,000.

The dividend is treated as part of the income in the hands of the trustee and the beneficiaries so that it appears in the accounts. But it carries no further tax, which prevents the same dividend from being taxed twice.

Why the rules on discretionary payments matter

A trustee with a power to make discretionary payments can move income from the trustee, who is taxed on the remainder, to a beneficiary who may have a lower rate, for school fees or maintenance. The law makes the payment the beneficiary’s income for the year in which it is paid, whatever the apportionment.

It is not an expense of the trust, because it is a choice about who is to have the income and not a cost of earning it. If the total of such payments is more than the computed income, each is cut in proportion, so the trust cannot create a loss by paying out more than it earned.

A trustee who has no power under the deed or will to make such payments must not make them. One who does can be called to account by the beneficiaries.

How the trustee’s variable fee is worked out

Where the deed fixes the trustee’s fee as a percentage of the computed income, the fee is itself an expense, so the computed income is the amount after the fee. That is why the percentage is applied by a fraction, for example 2.5 ÷ 102.5 for a fee of 2.5%, or 5 ÷ 105 for a fee of 5%.

The base is the total income less the other expenses and annuities, and not the figure after the fee. If the deed instead says the fee is a percentage of gross income, as in Example 5, it is a straight percentage of that income.

Summary of who pays on what

Short notes: executors and the final year

An executor is a trustee of the estate for the period of administration. He collects the income of the deceased’s assets, pays the debts and expenses that the will authorises, and distributes the residue. His accounts run to 31 December each year and to the final distribution. The deceased himself is assessed to the date of death under the rules for individuals, with the cessation rules for any trade.

From the day after death the income is that of the estate, taxed as above. A beneficiary who receives income during the administration is taxed on it in the year in which he has it. The executor is taxed on any income not given out.

The position from 2026

Under the Nigeria Tax Act 2025, which took effect on 1 January 2026, an individual with taxable income of ₦800,000 or less a year pays nothing; the rates then rise by band from 15% to 25%, and the consolidated relief allowance no longer exists. Residence is now defined in the Act, and a resident is taxed on world income. Compensation for loss of employment or injury is exempt up to ₦50 million (it was ₦10 million).

Beneficiaries are therefore taxed on the new bands, and capital gains of individuals are taxed at progressive rates. Use the rules above for years before 2026.

Worked examples

1. Total income.
   ₦958,000 + ₦270,000 + ₦620,000 + ₦163,000 = ₦2,011,000.
2. Variable remuneration.
   2.5 ÷ 102.5 × (₦2,011,000 − ₦35,000 − ₦20,000 − ₦25,000 = ₦1,931,000) = ₦47,098.
3. Expenses = ₦35,000 + ₦20,000 + ₦47,098 + ₦25,000 = ₦127,098
   computed income = ₦1,883,902.
4. Less discretionary payments ₦105,000 = distributable income ₦1,778,902. Half, ₦889,451, goes to the beneficiaries at ₦222,363 each.
5. Ade.
   ₦222,363 + ₦40,000 = ₦262,363.
   Baruwa ₦252,363.
   Chidi ₦242,363.
   Dafur: ₦222,363 + ₦35,000 + ₦15,000 = ₦272,363.
6. The trustee is assessed on the other half: ₦889,451.

1. The total is not more than ₦500, so it is not treated as the settlor’s income; it is taxed in the usual way.
2. If ₦1,200 had been paid, the whole would be the settlor’s.

1. He was in Nigeria for less than 183 days, so the income is not treated as his.

1. No balancing allowance or charge is made on the trader in the year of death.
2. The estate is treated as having spent ₦600,000 on the day after death.
3. On the sale, any balancing charge is limited to the allowances given to him and to the estate, which is ₦300,000.

How to score full marks

• Define the terms exactly in a sentence each; they are common short questions.
• Lay out the computed income, then the discretionary payments, then the shares.
• Remember that discretionary payments are not expenses.
• Compute the variable remuneration by the fraction, for example 2.5 ÷ 102.5.

Common mistakes in the exam

• Deducting discretionary payments as an expense.
• Applying commencement and cessation rules to a trust.
• Missing that the trustee is taxed on the undistributed remainder.
• Taxing an infant child’s income on the child.
• Charging the trustee’s variable remuneration on income before the fixed items.

Quick revision

• Beneficiary, trustee, settlor: the three taxpayers.
• Preceding year basis; accounts to 31 December.
• Computed income less discretionary payments; apportion; trustee takes the rest.
• ₦500 limit and 183 days for an infant child’s income.

Practice questions

Questions 1 to 10 are multiple choice. Questions 11 to 13 are written. Try each before opening the answer.

Model answers

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