Exploring Tax Benefits And Strategies For Effective Wealth Management In Nigeria

INTRODUCTION

Wealth management is essential for securing financial stability and facilitating the orderly transfer of assets across generations. In Nigeria, with its dynamic economic conditions and evolving regulatory frameworks, the effective use of wealth management tools such as trusts and wills is increasingly vital. These tools are vital for preserving and managing wealth and are subject to detailed scrutiny of tax regulations. The taxation of wealth management tools is a complex area, influenced by myriad laws and regulations that can significantly impact financial planning strategies. Understanding the taxation of these wealth management tools is a complex field, influenced by a variety of laws and regulations that can have significant implications for financial planning.

This article explores the taxation intricacies of wealth management tools in Nigeria, examining the various aspects and mechanisms involved. It also highlights available tax exemptions and strategic planning options to minimize tax liabilities, providing crucial insights for anyone looking to effectively use these tools within the Nigerian legal and fiscal context.

Overview of Wealth Management Tools

In Nigeria, wealth management prominently involves two key tools: wills and trusts, each serving distinct purposes in financial planning and asset distribution.

Wills: A Will or a Testament is a legal document that enables an individual, known as the Testator, to dictate how his/her assets should be distributed after his/her death, and names one or more person(s) called the Executor, to manage the estate until its final distribution¹. The ability to designate assets to chosen beneficiaries makes wills an essential tool for ensuring that one's final wishes are honoured. For a will to be valid, it must be - (a) in writing, (b) signed by the Testator in the presence of at least two witnesses who are not beneficiaries, and (c) signed by a minimum of two witnesses attesting to the testator's signature in his presence and at the same time. In Nigeria, wills can vary, including statutory wills, nuncupative wills, and customary wills, catering to different cultural, legal, and personal preferences. It can be revoked or amended through subsequent wills, intentional destruction, or significant life changes such as marriage, unless these are pre- considered in the will. The strong legal framework, including the Wills Law Cap. 1431 in Lagos and similar laws in other states, ensures that wills are executed without disputes and truly reflect the Testator's intentions.
Trusts: A trust establishes a legal arrangement where a person, known as the Settlor, transfers assets to a Trustee, who then manages these assets for the benefit of others. This separation of legal title from beneficial enjoyment allows for flexible and efficient asset management that direct ownership does not permit, making trusts an indispensable tool for estate planning, tax optimization, and asset protection. Trusts are formed when a Settlor assigns assets to a Trustee, who then administers these assets according to the terms of the trust. This setup protects the assets from creditors and ensures they are managed efficiently in line with the Settlor's wishes. Common types of trusts include living trusts, testamentary trusts, and discretionary trusts, each tailored to specific management and inheritance needs. Trusts in Nigeria are regulated through a blend of common law, equity, and statutes, providing a structured approach to asset management and wealth preservation.

TAXATION OF WEALTH MANAGEMENT TOOLS

The taxation of wealth management tools such as wills and trusts are primarily governed by the Personal Income Tax Act (PITA). PITA mandates the taxation on the income of "individuals, communities, and families; and arising or due to a trustee or estate"² Other relevant tax laws are Capital Gains Tax Act and Stamp Duties Act. To effectively manage these tools for wealth management, it is important to understand the details of what is taxed, who is taxed, and how and when the taxation occurs.

What is Taxed?

Estates are classified into two categories: testate (established through wills) and intestate (formed without a will). Similarly, trusts are differentiated into living trusts (established during the settlor's lifetime) and testamentary trusts (formed post-settlor's lifetime). For this discussion, the term "estate" specifically refers to testates, which are created through wills. Both estates and trusts are recognized by law as juristic personalities capable of suing and being sued, conducting business activities, and managing properties and investments for the benefit of designated beneficiaries. Consequently, income generated by these entities through their economic activities is taxable under Nigerian tax laws.

For testamentary trusts and estates formed through wills, the taxation process begins with an assessment of the gross value of the assets for estate duty at the Probate Registry of the High Court in the state where the deceased lived. Additionally, any income these entities generate— whether through business activities, property rentals;³ dividends, interests,⁴ and profit or gains from other sources⁵ —is subject to personal income tax as outlined by PITA.

Furthermore, profits made from selling assets within the estate or trust, including shares and stocks, is subject to capital gains tax.⁶ Additionally, if the estate or trust executes any legal instruments that result in financial benefit, such transactions are liable for stamp duty.⁷

Who is charged?

In Nigeria, every individual, corporation sole or body of individuals deemed to be resident for the relevant year in a relevant state is liable to pay personal income tax.⁸ Within the context of wealth management tools, the tax obligations mainly rest on the persons or entities established to manage the assets of the deceased or settlor. Specifically, the executors of a will or the administrators (in cases of intestacy where an administrator is appointed) and the trustees of a trust are legally responsible for ensuring all tax liabilities are fulfilled.

For estates formed through wills, the executors appointed by the deceased manage the financial responsibilities of the estate. This includes paying estate duty, personal income tax on income generated by the estate, capital gains tax on the sale of assets, and stamp duty on legally executed instruments. These executors serve as the legal representatives of the estate, ensuring adherence to all tax obligations as required by law. In cases where there is no will, an administrator takes on these duties, appointed after receiving a Letter of Administration (LoA) from the probate registrar.

Similarly, for trusts, the trustees appointed by the settlor are tasked with managing the trust assets and handling any tax liabilities that arise from the trust's activities. Trustees, much like executors, are responsible for ensuring that the trust adheres to tax regulations, including paying personal income taxes on the income derived from trust assets, and managing capital gains tax and stamp duties as necessary.

This assignment of financial responsibility to executors, administrators, and trustees ensures that estates and trusts remain compliant within the tax framework while protecting the financial interests of the beneficiaries.

When and How Tax Liabilities Are Charged for Estates and Trusts?

The timing and method of tax liabilities for estates and trusts are essential for meeting legal obligations effectively. Different types of taxes are applied at various times and in specific ways, depending on the nature of the income or transaction. Understanding these processes is crucial for ensuring compliance and the accurate and timely filing of necessary tax returns.

Estate Duty: Estate duty is levied at the time of the testator's death and is paid before obtaining a probate at the Probate Registry. This duty must be settled before the estate can be lawfully distributed among the beneficiaries, typically handled during the probate process. Estate duty is charged as a percentage of the total value of the testator's assets, which varies by state. For instance, in Lagos state, estate duty is typically charged at approximately 10% of the estate's value.
Personal Income Tax: Income generated by the estate or trust, such as rental income or business profits, is taxed during the tax year in which the income is received. The executors or trustees are responsible for filing tax returns on behalf of the estate or trust, ensuring that any tax due on these incomes is paid annually. If the estate or trust employs individuals, including executors, administrator or trustees, it is required to deduct and remit their personal income tax (PAYE) to the appropriate tax authorities on or before the 10th day of the month following the month in which the deduction was made. Personal income tax on the chargeable income of an estate or trust is charged at rates ranging from 7% to 24%, depending on the income amount⁹. This tax is applied to the income before it is distributed to the beneficiaries.
Capital Gains Tax: This tax is triggered when any asset of the estate or trust is sold or otherwise disposed of, and a gain is realized. The tax is due in the tax period in which the disposal occurs, and it must be reported and paid by the executors or trustees in their capacity as the managers of the estate or trust. Following a recent amendment, capital gains tax is levied at a rate of 10% on the net gain realized from the disposal of assets, after accounting for all allowable deductions.
Stamp Duty: Stamp duty is charged at the time a relevant document or transaction is executed. For estates and trusts, this could involve the transfer of assets or any other legal agreements that require formal execution. Documents executed within Nigeria must be stamped within 40 days of execution,¹⁰ and documents entering Nigeria must be stamped within 30 days of arrival.¹¹ The duty is payable at the time of execution and must be settled to ensure the legality of the documents involved. Stamp duty is charged either at a fixed rate or on an ad valorem basis, depending on the nature of the instrument/document involved.
Withholding Tax: Certain types of income like dividends, interest, and royalties earned by the estate or trust are subject to withholding tax at source. This means the tax is deducted at the point of income distribution by the entity making the payment and remitted directly to the tax authorities. For dividends and interest, the estate or trust is required to pay a withholding tax of 10%, while royalties are subject to a 5% withholding tax.¹² Recently, the Federal Finance Minister has initiated a new regime on withholding taxes under the powers granted by CITA, PITA, and CGTA.¹³

TAX ALLOWANCES AND EXEMPTIONS FOR WEALTH MANAGEMENT

The Personal Income Tax Act (PITA) not only sets the rules for the taxation of estates and trusts but also offers various tax allowances and exemptions to eligible entities.¹⁴ These provisions can significantly benefit wealth management strategies by reducing tax liabilities. Below are key tax allowances and exemptions available under PITA for estates and trusts:

Allowable Deductions: Estates and trusts are permitted to deduct expenses that are wholly, exclusively, necessarily, and reasonably incurred in generating income.¹⁵ This includes management fees, professional fees, and other related expenses which are critical in the day-to-day administration of estates and trusts.
Consolidated Relief Allowance (CRA): The CRA is a tax allowance granted to individual employees by a deduction of whichever is higher between N200,000 or 1% of gross income plus 20% of that income.¹⁶ This allowance benefits salaries paid to employees directly employed by the estate or trust, such as executors and trustees under paid employment, and other staff in charge of administration of the estate or trust.
Dividends and Interest Exemptions: Dividends paid to the estate or trust by a Nigerian company, where the original investment was wholly paid for in foreign currency and the estate or trust holds not less than 10% of the equity share capital of the Nigerian company, are exempt from tax.¹⁷ This exemption is particularly relevant for estates or trusts that hold investments in local companies as part of their asset management strategy.
Income from certain bonds and securities: Income derived from government securities, including bonds issued by Federal, State, and Local Governments, which are often held as part of estate or trust assets, can be exempt from personal income tax¹⁸ as well as capital gain tax.¹⁹ This also includes income from bonds issued by corporates and supranational entities, where applicable.²⁰ Interests accruing from holding such bonds and securities are also exempted.²¹
Interest from foreign currency domiciliary accounts: Interests accruing on foreign currency domiciliary accounts held by the trust or estate are exempt from personal income tax.²² This is crucial for estates and trusts that manage funds in various currencies, providing a tax-efficient way to handle foreign income.
Interest Expense: For estates and trusts, interest expenses incurred on loan facilities that are used as capital to generate income can be deducted when calculating Personal Income Tax (PIT) liability.²³ For example, if a trust takes out a loan to invest in income-generating real estate or other business ventures, the interest paid on that loan is deductible from the income produced by those investments, thus reducing the overall taxable income of the trust.
Bad Debt: PITA allows estates and trusts to deduct bad debts that have been definitively deemed non-collectible within the assessment period, as well as to estimate doubtful debts that might become bad.²⁴ If a debt previously written off as bad is later recovered, it must be reported as income. In practice, if an estate holds debts that are owed to the deceased and these are not recoverable, they can be written off, lowering the estate's taxable income. However, any recovery of these debts in future must be declared as income for tax purpose.

TAX PLANNING STRATEGIES FOR WEALTH MANAGEMENT

Effective tax planning is essential for families aiming to manage and preserve their wealth efficiently in Nigeria. By implementing strategic measures, families can significantly enhance the transfer of wealth to future generations while minimizing tax liabilities under Nigerian tax law. Here are a few effective strategies:

Utilizing Trusts for Estate Planning: Trusts are a cornerstone of estate planning in Nigeria. They offer a means to minimize liability on estate duties and provide a controlled mechanism for managing family assets. Trusts allow wealth to be allocated according to the settlor's wishes, potentially avoiding the higher taxes associated with direct transfers through wills. Moreover, trusts can address certain social issues that might arise during the inheritance sharing process.
Real Estate Planning: Since capital gains tax does not apply to inherited properties (though it does apply to properties that are sold), families often choose to retain real estate within the family instead of selling it. This strategy sidesteps the 10% capital gains tax, helping to preserve the asset's value within the family estate. Maintaining property within the trust or estate ensures its appreciation benefits future generations without immediate tax implications.
Investing in Tax-Free Securities: Investments in certain government securities, including specific bonds and treasury bills, along with substantial foreign currency investments, often come with income tax exemptions. These investments can serve as a secure method to generate tax-free income, preserving more capital for future generations.

CONCLUSION

The taxation of wealth management tools in Nigeria involves a complex interplay of legal frameworks and tax regulations that are crucial for effective financial planning and wealth preservation. This article has explored the nuanced taxation mechanisms of wills and trusts, underlining the importance of understanding both the tax liabilities and the strategic exemptions available under Nigerian law. By effectively leveraging these instruments, individuals can optimize tax efficiency, ensuring that their wealth management strategies not only comply with legal requirements but also maximize the financial benefits for future generations.

For further details on effective tax strategies, please contact us at Bashir Ramoni.

Footnotes

1. Asika v. Atuanya (2013) 14 NWLR (pt. 1375) 510 at 528 (SC)

2. Section 1, Personal Income Tax Act

3. Section 3(1)(c), Ibid.

4. Section 3(1)(d), Ibid.

5. Section 3(1)(f), Ibid.

6. Section 1(1), Capital Gains Tax Act.

7. Section 3, Stamp Duty Act.

8. Section 2(1), Personal Income Tax Act.

9. Item 3, Sixth Schedule, Personal Income Tax Act

10. Section 23(1) Stamp Duty Act

11. Section 23(4) Ibid.

12. Federal Inland Revenue Service. Accessed on 22nd May 2024 at https://www.firs.gov.ng/withholding-tax-wht/

13. The Federal Ministry of Finance has recently issued the Deduction at Source (Withholding) Regulations 2024 effective from 1st July 2024.

14. Third Schedule, Personal Income Tax Act.

15. Section 20(1), Ibid.

16. Section 33, Personal Income Tax Act.

17. Item 25, Third Schedule, Ibid.

18. Item 31A(a), Third Schedule, Ibid.

19. Section 30 of the Capital Gains Tax Act

20. Item 31A(b), Ibid.

21. Item 31(A)(c), Ibid.

22. Item 28, Ibid.

23. Section 20(1)(a), Personal Income Tax Act.

24. Section 20(1)(e), Ibid.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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