TAXATION OF RESIDUAL INCOME OF SETTLEMENTS, TRUSTS OR ESTATES UNDER THE NIGERIAN TAX ACT 2025

INTRODUCTION

The taxation of settlements, trusts, and estates is a fundamental component of Nigeria’s personal income tax framework. While most discussions focus on how income from such arrangements is computed and distributed among beneficiaries, an often-overlooked aspect is the treatment of residual income. Residual Income refers to the portion of income left after all distributions, payments, and apportionments have been made.

Under the Nigerian Tax Act, 2025 (NTA), particularly the Fifth Schedule, the law makes clear provisions for determining how this residual income is taxed and who bears the tax liability. The rules are rooted in the principle that income generated from assets or property, regardless of whether they are held individually or in trust, should not escape taxation.

This article examines the concept of residual income under settlements, trusts, and estates, its computation, and how such income is taxed under the NTA.

LEGAL FRAMEWORK

The taxation of trusts, settlements, and estates is primarily governed by Section 16 of the Nigerian Tax Act, 2025, which provides that the income of an individual, trustee, or executor from a settlement, trust, or estate, whether made, created, or administered in or outside Nigeria shall be ascertained in accordance with the provisions of the Fifth Schedule to the Act.

Paragraphs 3 and 4 of the Fifth Schedule outlines how the income of a settlement, trust, or estate is computed and apportioned. Specifically, Paragraph 4(c) addresses what happens to any remaining or residual income after all authorized deductions and distributions to beneficiaries have been made. Paragraph 4(c) of the Fifth Schedule provides that:

“Any remainder of the computed income of a settlement, trust or estate of any year after deducting all amounts apportioned to beneficiaries, or treated as income in the hands of beneficiaries under the provisions of sub-paragraph (b) of this paragraph shall be apportioned to the trustee or executor for assessment in his name as trustee of the settlement or trust or as executor of the estate.”

In simpler terms, residual income that remains after all beneficiaries have received their due portions is assessed and taxed in the hands of the trustee or executor.

Residual income which refers to the unapportioned or undistributed portion of the computed income of a trust, settlement, or estate at the end of a tax year arises in situations where:

1. The trustee or executor, after meeting all obligations (expenses, annuities, and distributions), still has a surplus of income remaining; or

2. The deed of trust or will does not specify full distribution of income to beneficiaries within the accounting period; or

3. Certain income or gains are retained to preserve the estate or trust fund for future use.

In all these scenarios, the law ensures that the residual portion does not remain untaxed. Instead, the trustee or executor is treated as the taxpayer with respect to that residual amount, even though the income is held in a fiduciary capacity.

COMPUTATION LEADING TO RESIDUAL INCOME

Before arriving at the residual income, the total income of the trust or estate must first be computed in line with Paragraph 3 of the Fifth Schedule. This computation involves:

1. Determining total income for the year, including rents, dividends, business income, and other receipts.

2. Deducting authorized expenses of the trustee or executor, such as management and administrative costs allowed by the trust deed or will.

3. Deducting any fixed annuities or annual payments directed by the deed or will.

4. Adjusting income from trades, businesses, or property in accordance with Chapter Two of the NTA (Chapter Two makes provisions for the Taxation of Income of Persons) and Section 28 (this section makes provision for the total income of an individual for any year of assessment), as though the income were that of an individual taxpayer.

The balance after these deductions is termed computed income. It is this computed income that is apportioned among beneficiaries or taxed in the hands of the trustee or executor.

TAX TREATMENT OF RESIDUAL INCOME

The NTA 2025 mandates that any residual income be taxed in the name of the trustee or executor. The key principles for taxation of residual income are:

1. Tax Liability – the trustee or executor bears the legal responsibility to file tax returns and pay tax on the residual income.

2. Rate of Tax – the residual income is taxed as if it were income of an individual taxpayer, applying the same tax rates and rules under the NTA.

3. Timing of Assessment – the income is assessed in the tax year in which it arises, i.e., the year of assessment corresponding to the accounting year ending 31 December.

PRACTICAL AND LEGAL IMPLICATIONS

Responsibility of Trustees and Executors – Trustees and executors must maintain clear records of income, expenses, and distributions to accurately determine what constitutes residual income.

Prevention of Tax Evasion – By taxing residual income in the trustee’s or executor’s name, the law closes any potential loophole that could allow trustees to indefinitely defer distribution (and hence taxation) of income.

Beneficiary Rights – Beneficiaries have no immediate tax obligation on residual income unless such income is distributed to them in subsequent years. At that point, the income becomes assessable in their hands. It is important to note that residual income risk double taxation, first at the hands of the trustee and again upon distribution to beneficiaries. Therefore, careful distribution and proper tax planning is required to avoid double taxation.

CONCLUSION

The Nigerian Tax Act, 2025, provides a comprehensive mechanism for ensuring that no income arising from a settlement, trust, or estate escapes taxation. The taxation of residual income under Paragraph 4(c) of the Fifth Schedule is a key part of this framework. By requiring trustees and executors to account for and pay tax on any remaining computed income, the law promotes transparency, accountability, and fairness in the taxation of fiduciary arrangements.

In practical terms, trustees and executors must view the computation and taxation of residual income as a core fiduciary duty, an obligation not only to beneficiaries but also to the State. Proper understanding and compliance protect both the integrity of the trust or estate and the fiduciary from legal or financial exposure.