a trust), the income arising is treated as the settlors income for all tax purposes. GET A QUOTE. an interest in possession in an '18-25 trust' where the death of the person with the interest occurs before the beneficiary reaches 18 A person has an interest in possession if. Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority. To control which cookies are set, click Settings. This would be a chargeable lifetime transfer, and they should notify the trustees who may need to account for any IHT. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. Clearly therefore, it is not always necessary for the trust property to produce income. IIP trusts will need to be entered on the HMRC trust register if they have income that is not mandated directly to the life tenant, or capital gains from disposals. In contrast bonds are non-income producing investments and withdrawals are a return of capital not income. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). With regard to the existing life interest, the crucial factor is whether it is: Because a life tenant with a qualifying interest in possession is treated as being beneficially entitled to the property in which the interest subsists (section 49(1)), its termination results in a loss to the life tenants inheritance tax estate and is a transfer of value (section 52). Trustees must hold the balance fairly between different categories of beneficiary. FLITs are essentially a life interest for a person (usually the surviving spouse), with an underlying discretionary trust that will arise when the surviving spouse dies. This is a right to live in a property, sometimes for life, but more often for a shorter period. The trustees exclude the mandated income from the trust and estate tax return and the beneficiary (or, where the settlor has retained an interest, the settlor) includes the income on his/her tax return. As time goes on, more trust interests will fall into the relevant property regime, with the flexibility for revoking and reinstating income interests in possession without any inheritance tax consequences (assuming the trustees have the powers to do so). As a result, S46A IHTA 1984 was introduced. While the life tenant is alive, the trust is treated as an interest in possession trust. An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. As such, the property doesn't go through the probate process. Income tax anti-avoidance measures treat the trust income as that of the settlor if they and/or their spouse/civil partner can benefit from the trust. Interest In Possession & Resident Nil-Rate Band. Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. There is an exception for disabled person's trusts. If trust income passes directly or indirectly (for example, through an investment manager) to a beneficiary without going via the trustees the beneficiary needs to ensure that it is returned correctly on his/her tax return. The income, when distributed to them, retains its source nature, for example, dividend or interest. This is because by paying the tax which is primarily the responsibility of the trustees as 'donees', there is a further loss to the settlor's estate. Assuming no mandating procedure has been carried out then the trustees should make a Trust and Estate Tax Return, Again, assuming no mandating procedure is in place, the IIP beneficiary should receive a statement from the trustees of trust income. For the purposes of the residence nil-rate band, s8J IHTA 1984 states that property within an Immediate Post-Death Interest settlement (which is broadly an Interest in Possession Trust created via a Will see s49A IHTA 1984) is deemed to be part of the life tenants estate and so can be inherited by direct descendants this will generally be determined by the trust deed. 22 March 2006 was the day of the 2006 Budget which made far reaching changes to the IHT treatment of trusts, many of which took immediate effect. Trustees need to be mindful that investments should be suitable. The RNRB applies when a qualifying residential property interest is inherited by a direct descendant. This means that the crystallisation of capital gains can be deferred until the asset transferred is realised by the trustees (or following a further holdover claim realised by a beneficiary). If these conditions are satisfied then it is classed as an immediate post death interest. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). Trust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax on the following occasions: on the death of the beneficiary with the interest in possession on the death of the beneficiary within seven years after a transfer or lifetime termination of his interest However, trustees will not be able to deduct any expenses from mandated income. There are special rules for life policy trusts set out later. Broadly speaking, a person has an interest in possession in property if he or she has the immediate right to receive any income arising from it or to the use or enjoyment of the property. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. There are no capital gains tax consequences for lifetime gifts involving cash or existing bonds. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. Assets held within an Interest in Possession Trust are treated for Inheritance Tax purposes as if they belong to the Life Tenant. On the death of your spouse as the life tenant, as the main residence is deemed to be part of your spouses estate and is inherited by direct descendants of your spouse then the RNRB is available both your spouses RNRB and your transferred RNRB subject to meeting other conditions. This site is protected by reCAPTCHA. Registered number SC212640. Otherwise the trustees if the trust is UK resident. Immediate Post Death Interest in Possession Trust (IPDI) when an IIP begins immediately after the death of the person who has created the trust in their Will. Examples of this are where the IIP beneficiary is a spouse, civil partner or minor child of the settlor. Indeed, an IIP frequently exist in assets that do not produce income. Replacing the IIP beneficiary with a new IIP beneficiary on or after 6 October 2008 will be a chargeable lifetime transfer (and may therefore incur a lifetime charge of 20% depending on the value) from the beneficiary that has been replaced. SC Estates Unit 1 types of estates Estate: legal interest or right in the property Possession: ex: tenants have the right to possession Ownership Interest: right to claim on a property Fee: a form of ownership - means owner has a certain set of rights Title: evidence of ownership Freehold estate: interest in real property for an undetermined length of time Fee simple: ownership conveyed to . Evidence. Qualifying interests in possession include an interest in possession created before 22 March 2006, an immediate post-death interest, a disabled persons interest and a transitional serial interest (TSI, within section 49C or 49D). Prior to 22 March 2006, insurance companies commonly offered flexible or power of appointment IIP trusts where the trustees have a power to appoint amongst, or to vary, beneficiaries. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. A disabled persons trust was set up after 8 April 2013, but the trust documentation refers to the pre-2013 rules requiring half of the trust capital applied during the disabled persons lifetime to be applied for their benefit. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. What else? Increasingly, we are likely to see fewer lifetime terminations of qualifying interests in possession (in the absence of reliefs, such as business property relief and agricultural property relief). We may terminate this trial at any time or decide not to give a trial, for any reason. There is a chargeable transfer by the deceased unless the IIP is for the spouse or civil partner in which case it is an exempt transfer. It will not become subject to the relevant property regime. As a result of IIP and Accumulation & Maintenance Trusts being brought into line with discretionary trusts for IHT purposes, any capital gains on the transfer of chargeable assets into these trusts from 22 March 2006 have become eligible for CGT holdover relief under s260(2)(a) of the Taxes and Chargeable Gains Act 1992 (Gifts on which IHT is chargeable etc.). To qualify the interest cannot be under a bereaved minors trust or a trust for a disabled person and this must have been the case since the life tenant became entitled to the interest. The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. Investment bonds do not produce an income and there is no income tax charge unless money is withdrawn from the policy and a chargeable event occurs. Because a life tenant with a qualifying interest in possession is treated as being beneficially entitled to the property 'in which the interest subsists' (section 49 (1)), its termination results in a loss to the life tenant's inheritance tax estate and is a transfer of value (section 52). An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. These TSIs apply to IIP trusts commencing before 22 March 2006. Interest in possession (IIP) is a trust law principle that has UK taxation implications. This field is for validation purposes and should be left unchanged. If the trustees choose to mandate the income directly to the beneficiary they will not need to report it on the trust tax return, which reduces their administrative costs. A TSI can also arise with life insurance trusts. Note that Table 1 refers to an 'accumulation and maintenance trust'. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. Beneficiary the person who is entitled to benefit in some way from assets within a trust. Since 6 October 2008, changing a beneficiary of one of these trusts will normally bring it into the relevant property regime and taxed in the same way as a discretionary trust. If prior to 6 October 2008, the pre 22 March 2006 IIP came to an end while the income beneficiary was still alive to be replaced by a new beneficiary, then that new beneficiary will be taxed under the pre 22 March 2006 rules. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. Top-slicing relief is available. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. Lionels life interest will qualify as an IPDI. The life tenant only has an automatic entitlement to trust income and not capital. A beneficiary who is entitled to the income is personally liable to tax on that income whether it is drawn or left in the trust fund. HMRC will effectively treat the addition as a new settlement. The trustees will acquire assets at their market value at the date of death. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. The intestacy laws of England and Wales from 1 October 2014 provide for 250,000 (or the whole non-joint estate if less) and 50% of any excess to the spouse, remainder to adult children. Remember that personal allowances are available to individuals only and not to trustees. She has a TSI. For all our latest news and advice sign up to our Enewsletter below. This meant that there was never an immediate charge to IHT whatever the value of the gift, but there could retrospectively be a charge should the settlor die within seven years of making the gift. However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. Moor Place? These are known as 'flexible' or 'power of appointment' trusts. The trustees are initially be taxed on the trust income because they receive it (though see later section on mandating income to the beneficiary). Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. If the value of the trust and the estate together exceed the Nil Rate Band tax will be due at 40% on any excess and this will be apportioned between the trust and the estate. The remainderman of the IIP trust is Peters' daughter. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. She remains the current life tenant of the trust. Other beneficiaries do not. An interest in possession in trust property exists where . Click here for a full list of Google Analytics cookies used on this site. For life insurance policies written into trust before 22 March 2006, there was a concern that regular premiums paid after that date would give rise to relevant property implications. As outlined below, it is possible for trustees to mandate trust income to a beneficiary. The trustees may have discretion over where and when to pay capital or it may pass automatically to named beneficiaries when the life interest ends. Discretionary trust (DT): . For tax purposes, the inter-spouse exemption applied on Ivans death. Regular withdrawals from a bond may erode the capital payable to the remaindermen on the life tenants death and withdrawals could be taxed as income by HMRC. An IIP trust can be created on death either by the terms of the deceased's Will, the laws of intestacy or a deed of variation. If the life tenant dies while the settlor is still living and the interest in possession reverts to the settlor on the life tenant's death, the value of the trust property is left out of account . What is the CGT treatment of an interest in possession trust? In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. You can learn more detailed information in our Privacy Policy. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. The trust fund is within the IHT estate of Jane. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. Whilst the life tenant of a FLIT is alive, the property is . If the settlor does not wish to reclaim the tax from the trustees this could be seen as a further gift. S8K IHTA 1984 defines a direct descendant as the deceased persons child, grandchild or other lineal descendant, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner), a child who is, or was at any time, their step-child, their adopted child, a child who was fostered at any time by them, a child where theyre appointed as a guardian or special guardian when the child is under 18. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. IIP trusts are quite common in wills. Importantly, trustees cannot accumulate income. Edward & Fiona) who were entitled to the income generated by the trust assets and allowed a discretionary class whereby the trustees could choose to allocate the capital to anyone in either class. as though they are discretionary trusts. Access this content for free with a trial of LexisNexis and benefit from: To view the latest version of this document and thousands of others like it, sign-in with LexisNexis or register for a free trial. she was given a life interest). The payment of ongoing premiums or the exercise of an existing policy option to increase the benefit or extend the term does not cause a problem. Qualifying interest in possession trustsIHT treatment Trust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax (IHT) on the following occasions: on the death of the beneficiary with the interest in possession (the life tenant) Under current rules, the maximum tax rate applicable to the exit charge would be 6% of the value of any assets exceeding the Nil Rate Band. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. TSI (1) The transitional period to 5 October 2008 (S49C IHTA 1984), TSI (2) Surviving spouse or civil partner trusts (S49D IHTA 1984), TSI (3) Life insurance trusts (S49E IHTA 1984). Someone who holds an IIP in property that was settled before 22 March 2006 is treated as if they owned the settled property, but, Someone who holds an IIP in property settled on or after 22 March 2006 is not generally treated as owning it; and that property will typically fall under the relevant property regime, Interest received from Open Ended Investment Companies (OEICs) or from banks/building societies, is received gross and taxable on the trustees at 20%, Rental profits after allowable expenses are also taxed at 20%, Trustees receive gross interest of 1,000 on which they pay tax at 20% of 200, The beneficiary receives 800 from the trustees, The beneficiary is entitled to the gross amount 1,000, and is taxable on that amount, The beneficiary is given credit for the 200 tax paid by the trustees, If the beneficiary is a higher rate taxpayer further tax will be payable, If the beneficiary is a non- taxpayer then a repayment claim will be possible, is not settlor interested but the trust income passes directly to the settlors relevant minor child. In 2017 HMRC set up the Trust Registration Service. Any transfer of an asset out of the trust may give rise to a liability if there has been a substantial gain prior to distribution. * Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. Gina has recently passed away. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. The 2006 legislation introduced the concept of a TSI. On Lionels death the trust fund will be inside his IHT estate. Note that a Capital Redemption policy is not a life insurance policy. A life interest trust (also known as "an interest in possession trust") is an arrangement recognised by English law under which someone is given the right to use an asset (usually a house) for the rest of their life without ever becoming the owner of the underlying capital. Where the settlor has retained an interest in property in a settlement (i.e. The 100 annual limit is per parent and per child. Trustees can also claim principal private residence (PPR) relief on the disposal of residential property that has been occupied by a beneficiary of the trust as their only or main residence. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. The CGT death uplift is available on Harrys death and Wendys death. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. This is a right to live in a property, sometimes for life, but more often for a shorter period. High Court sets aside Will of elderly man whose mind was poisoned by his daughter, What we can all learn from King Charles Inheritance Tax liabilities. Existing user? These cookies enable core website functionality, and can only be disabled by changing your browser preferences. However, an election can be made to defer the CGT liability by claiming hold-over relief, regardless of the nature of the assets being distributed, provided that the beneficiary is becoming absolutely entitled to the trust assets without previously having been entitled to an IIP. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter).