Scrutiny tightens on trusts as new tax rule charges based on the residency of the settlor

For Nigerian investors navigating volatile markets, wealth protection is no longer just about chasing high returns; it demands careful structuring, tax planning, and a nuanced understanding of available investment vehicles.

“A trust is typically used to protect assets. It splits ownership, so while I may receive distributions, the title itself is separated. Under the new law, we must examine who controls the trust. Wherever the settlor is resident, the trust takes on that residence. Once it is resident in Nigeria, the trust is liable to pay taxes on its worldwide income,” Esiri Agbeyi, Partner at PwC, said.

This was discussed during a webinar hosted by Meristem, themed ‘Navigating the new tax acts’ on December 10th, experts explained how trusts, fixed-income securities, and foreign-currency investments can either safeguard or erode wealth depending on how they are managed and documented.

In Nigeria, trusts are treated as separate taxable entities. The income generated within a trust, whether from dividends, interest, or rental properties, may be taxed at the trustee level or passed on to beneficiaries, depending on the trust’s legal framework.

This is why informal or undocumented trusts often create ambiguity, giving tax authorities grounds to levy additional assessments. Though Trusts can provide clarity for heirs and long-term wealth preservation, poorly structured arrangements can result in unintended tax liabilities, undermining the very purpose of setting up the trust.

Also, the expert explained how fixed-income instruments will be taxed under the new law going into the new year.

“Interest on foreign-currency deposit accounts is now subject to 10 percent withholding tax. Many of the previous tax benefits have been removed to ensure these taxes are payable to Nigeria. For fixed-income securities, the only exemptions that remain are federal and state government bonds; all other instruments are now subject to mandatory deductions,” Albert Folorunso, Managing Consultant at Kreston Pedabo, said.

Fixed-income and foreign-currency investments present similar challenges. Government securities, such as bonds, often enjoy tax-exempt interest, but corporate bonds, Eurobonds, and dollar-denominated assets may be subject to withholding taxes.

Gains from foreign-currency instruments are also subject to Nigeria’s global income tax rules for residents, meaning the actual returns can be significantly lower than the headline yields if investors fail to plan for these obligations.

Industry analysts warn that many investors assume government bonds or foreign-currency instruments are fully tax-exempt. Ignoring the rules can quietly erode returns, sometimes faster than market swings. As one speaker noted, understanding both the structure of a trust and the tax treatment of investment instruments is crucial.

In 2025, investor interest in Nigerian government securities remained robust despite a slight decline in overall subscription volumes for FGN bonds, largely driven by the government’s strategic decision to offer fewer instruments amid high interest rates.

According to the Debt Management Office (DMO), the total FGN bond subscriptions in the first seven months of 2025 reached N4.67 trillion, a 9.9 percent drop from the N5.18 trillion recorded in the same period of 2024, yet individual auctions were consistently oversubscribed.

Meanwhile, a review of high-net-worth family trusts revealed that roughly 60 percent were either non-compliant or lacked proper documentation, exposing beneficiaries to unexpected tax bills and creating potential legal disputes.

“Trusts, when structured correctly, can reduce tax exposure, provide clarity for heirs, and preserve wealth across generations,” Agbeyi said. “The problem arises when people replicate structures without professional guidance or attempt to avoid transparency. That’s when the risk outweighs the benefits.”

Experts also emphasised the importance of considering currency exposure in fixed-income investments. Dollar-denominated instruments may offer higher nominal yields than naira-based bonds, but exchange-rate volatility can quickly erode returns if not properly hedged.

“Investors need to think beyond headline yields. Foreign-currency investments are attractive, but the risks from currency depreciation to taxation can significantly lower net profits,” Folorunso noted.

For Nigerian investors, wealth protection is as much about compliance and structure as it is about returns going forward, according to these experts. Carefully formalised trusts, aligned with clear tax strategies, and judicious selection of fixed-income and foreign-currency instruments can create a buffer against market shocks and unforeseen tax burdens. Conversely, neglecting these factors can quietly erode gains, leaving families worse off despite appearing to hold safe or profitable assets.