Technical article
Taking Principal Out of the Trust: Is It a Gift, Income or an Inheritance for the Heir?
A country can treat the money as income, as a gift or inheritance, or as nothing taxable.
Imagine a trust abroad that pays a grandchild US$100,000 of the original capital, as an example. No earnings are in it, only the money the family put in. Does the grandchild owe tax? The answer depends on where the grandchild lives, and on what the local tax office calls the payment.
The sources show three families of answer. A country can treat the money as income, as a gift or inheritance, or as nothing taxable. The table groups what the files show.
| Treated as | Country | What the sources say | Tier |
|---|---|---|---|
| Not taxable | New Zealand | Payments of trust capital and realised capital gains from a foreign trust are not taxed | A |
| Not taxable | Italy | Distributions from an opaque trust in a low-tax place are presumed to be income unless the heir proves they are capital; proven capital is not taxed as income | B |
| Income | Germany | 26.375% flat on the full payout, principal included | B |
| Income | United Kingdom | Matched to the trust's gains and income, with the heir's rate up to 45% | B |
| Income | South Africa | One 2019 article says a capital payment can be taxed as income | U |
| Gift or inheritance | Colombia | 15% occasional-gain tax, paid by the heir | B for the rate, U for the trust link |
| Gift or inheritance | Portugal | 10% stamp tax as a gift, no income tax, none on assets outside Portugal | C |
| Gift or inheritance | France | A payment is taxed as investment income at a flat 30% to 31.4% (the sources differ) unless the heir proves it is a return of capital; it may also be treated as a gift case by case | B for the income rule, C and U for the rest |
| Family exemption | Mexico | Inheritances and gifts from parents and children are exempt from income tax | B |
On the US$100,000 example, Germany takes about US$26,400. Portugal takes US$10,000 on a payment to someone outside the exempt family, and only when the assets are in Portugal. A spouse, child or grandchild is exempt from the stamp tax according to one Portuguese tax-advice site (tier U), though the heir still files a declaration. New Zealand takes nothing.
Why the label matters. Income is taxed at the heir's rate each year, and the rate can reach 45% in the UK or 47% in Germany. A gift or inheritance is taxed under a separate scale, often with allowances. Colombia's 15% is the flat rate on inheritances, legacies and gifts alike. A payment treated as nothing taxable leaves the family with the full amount.
What the sources add. Italy also taxes transfers from trusts under its inheritance and gift tax, 4% over EUR 1 million (approximately US$1.1 million) per heir for a child, and 8% for people outside the family. In Switzerland, payments from a revocable trust count as gifts from the person who set it up, taxed by family relationship if that person lives in Switzerland, while payments from an irrevocable discretionary trust are generally income. Ireland's sources say a capital benefit can still draw income tax, and that capital gains tax or capital acquisitions tax may apply, not both. One firm's page puts the effective rate at 55% or 67%.
The Mexican line. Mexico treats a foreign trust used by a resident as transparent, with income recognised each year at 10% to 35%. Its inheritance and gift rule is separate, and the exemption covers spouse, parents and descendants. Gifts from others are exempt up to MXN 128,384 (approximately US$7,000) a year.
You might say: "Capital is my own family's money. Why would any country tax it?" Germany taxes the full payout, principal included, at a flat rate. The UK matches a payment to the trust's gains and income before it treats anything as capital. So a payment the family sees as its own capital can be read by the heir's country as earnings. In Germany, income already attributed to the heir in earlier years is not taxed again at payout.
You could look at three things before a payout: how the heir's country labels the payment, whether the money in the trust includes gains, and whether the trust is revocable.
If a payment of capital from a trust reached someone in your family, how did their country treat it, and what did you learn? Share it here, because someone with a similar payment ahead may benefit from your story.
Figures are estimates for planning, based on public data. Date read: October 2026.
Sources
- Inland Revenue New Zealand, trusts and tax residency (A)
- Chambers Private Wealth 2026, Germany and New Zealand (B)
- PwC Tax Summaries for Colombia, Italy, Mexico and Switzerland (B)
- Withers on Italian trusts (B)
- LVP Advogados on Portugal (C)
- Blick Rothenberg and Saffery on UK trusts (B)
- FA News on South Africa, 2019 (U)
- Matheson on Ireland (B)
- French tax guides (C, U)
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