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). 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). There should not, for example, be a requirement for trustees to follow a mechanical rule for preserving the real value of the capital when the life tenant was the deceaseds widow who had fallen on hard times when the remainderman was young and well off. My VIP Tax Team question of the week: Mixed Partnerships, My VIP Tax Team question of the week: Associated Company rules from 01.04.23, My VIP Tax Team question of the week: PPR & Transfers. For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. Therefore a more detailed review of your particular circumstances would be required before a definitive answer could be provided. 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. These may be subject to change in the future. 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. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. He dies in 2020 and his wife Wendy then takes an IIP her interest will be a TSI and because her estate is increased, spouse exemption is available. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs). In valuing the trust property the related property rules will apply. on death or if they have reached a specific age set out in the trust deed etc. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. She has a TSI. Prior to 22 March 2006 the value of trust assets was re-based for CGT purposes on the death of the beneficiary of an IIP trust. Where value is added after 21 March 2006 this will not result in any of the trust fund becoming relevant property provided the addition is indeed solely of value and not and addition of property. 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). For UK financial advisers only, not approved for use by retail customers. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. The trust fund is within the IHT estate of Harriet. Trustees need to be mindful that investments should be suitable. The life tenant's interest may entitle them to income generated by trust assets, or it may allow them the use of the assets (for example, if a house is contained in the trust they might be granted the right to live in that house). In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. Where the settlor has retained an interest in property in a settlement (i.e. Interest in possession (IIP) is a trust law principle that has UK taxation implications. However, if there were any gains held over on creation of the trust (which could only apply if the assets were business assets) their death will bring the held over amount into charge. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. FA 2006 changed the definition of a qualifying IIP so that it now excludes any settlement created on or after 22 March 2006, other than an IPDI, disabled persons interest, or TSI. The new beneficiary will have a TSI. A closer look at when a beneficiary has a life interest in the income of a trust fund. These are known as 'flexible' or 'power of appointment' trusts. A beneficiary of a trust has an IIP if they have the immediate right to receive the income arising from the trust property, or have the use and enjoyment of it. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). 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. This will be a potentially exempt transfer (PET) by Tom in favour of a life interest for Pete, which will be an immediately chargeable transfer by Tom. Immediate Post Death Interest. 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. This provides that the rights under the insurance contract are treated as pre 22 March 2006 and if the premium payment is a transfer of value then it will be a PET. They will typically use R185, Different rules apply where the income of the IIP beneficiary is treated as that of the settlor under the settlements legislation. Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. Similarly, S629 ITTOIA 2005 applies to situations where the IIP beneficiary is a minor child or step child of the settlor (who is neither married nor in a civil partnership). Replacing the IIP beneficiary with an absolute interest. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. Amanda Edwards TEP is a Solicitor with Boodle Hatfield. Bonds may be used, however, as part of an overall investment strategy to maintain capital for the remaindermen, using other investments to provide income for the life tenant. Gina has recently passed away. Does it make any difference how many years after the first trust that the second trust is settled? 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. Tax rates and reliefs may be altered. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Typically, the life tenant receives a right to enjoy the benefit of an asset until death, at which stage the asset passes to a remainderman. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. This does not include the former spouse/civil partner and so trusts set up for a widow(er) will not be affected. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). Indeed, an IIP frequently exist in assets that do not produce income. If however the income beneficiarys interest comes to an end on or after 22 March 2006 and the property remains in trust, then the outgoing beneficiary is treated as making a Chargeable Lifetime Transfer (CLT) based on the trust fund value at that time, and the trust will become subject to the relevant property regime. The content displayed here is subject to our disclaimer. Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. International Sales(Includes Middle East), Death of the beneficiary with the qualifying interest in possession, Calculation of inheritance tax on death of life tenant, Ending of an interest in possession during beneficiary's lifetime, Circumstances when IHT not chargeable on termination of a QIIP, Circumstances when termination of a QIIP treated as a PET, Circumstances where termination of a QIIP immediately chargeable to IHT, Reservation of benefit in a QIIPapplication of the GWR rules, Calculation of IHT on lifetime termination of QIIP, Special rate of charge where termination is affected by a previous PET. Consequently there was no CGT liability but the trustees were regarded as making a disposal of the trust assets at the then market value and the assets were deemed to have been acquired at their new base cost. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. Lifetime gifts into IIP trusts are now chargeable lifetime transfers (CLTs) that are subject to IHT at 20% if they exceed the settlor's nil rate band. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. 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. The trustees and executors can make use of the usual exemptions (eg, where trust or estate assets pass to a surviving spouse or to charity), and the transferrable nil rate band rules (where the Life Tenant is a widow or widower), to reduce the tax payable. It would generally be simpler to make further gifts to a new trust. On the Life Tenants death any assets owned by the trust at that point are revalued for Capital Gains Tax so that there is no gain or loss to the trustees. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. Where a beneficiary has a life interest in the income of a trust fund, any inheritance tax consequences of a lifetime termination of that interest will depend (ignoring any possible reliefs) both on the nature of the life interest being terminated and on the nature of the new interest being created. These beneficiaries are referred to as the remaindermen. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. They will normally need to strike a balance between a reasonable yield for the life tenant whilst giving the opportunity for capital growth for the remaindermen. Issue of redeemable sharesA limited company that proposes to issue redeemable shares must comply with the provisions of the Companies Act 2006 (CA 2006).Why do companies issue redeemable shares?A company may wish to issue redeemable shares so that it has an alternative way to return surplus capital, Amending the articles of associationThis Practice Note summarises the procedure to amend or change a companys articles of association in accordance with the Companies Act 2006 (CA 2006).Why amend the articles?There are many different reasons why a company may want, or be required, to amend its, Working with counselInstructing counsel to advocate on a clients behalf should be a matter of careful thought and preparation. Wards Solicitors is a trading name of Wards Solicitors LLP which is a limited liability partnership registered in England and Wales (registered number OC417965) and authorised and regulated by the Solicitors Regulation Authority under number 646117. the life tenant of an IIP trust created in 1995. The following Private Client practice note produced in partnership with Paul Davies of Clarke Wilmott LLP provides comprehensive and up to date legal information covering: 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), on the death of the beneficiary (life tenant) within seven years after a transfer or lifetime termination of their interest, on the transfer or conversion of the interest to a non-qualifying or discretionary interest. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). This website describes products and services provided by subsidiaries of abrdn group. Victor creates an IIP trust where his three children are life tenants. Please share this article with your clients. A tax efficient flexible arrangement was therefore obtained. Trusts can be created by either the transfer of cash to the trustees, or by the transfer of an actual asset, such as an existing insurance bond or portfolio of shares/mutual funds. 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.). The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. 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. This is a right to live in a property, sometimes for life, but more often for a shorter period. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. This means that on Peter's death, the assets of the trust will pass automatically to his daughter. Sign-in Flexible Life Interest Trust A Life Interest Trust where the trustees are given powers to advance capital from the trust to beneficiaries, including the Life Tenant, during their lifetime. This postpones the gain until the beneficiary ultimately disposes of the asset. This regime is explored here. 2023 Croner-i is authorised and regulated by the Financial Conduct Authority in respect of Insurance Mediation Services, Financial Services Register no. This allows the trustees to invest in life policies, such as investment bonds. The assets of the trust were . However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). The trust is classed as a relevant property trust which means that periodic charges apply every 10 years and exit charges when capital is paid out to beneficiaries. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. This Fact Sheet has been prepared to provide you with basic information. Understanding interest in possession trusts. These are usually referred to as life interest trusts (or life rent in Scotland). The beneficiary should use SA107 Trusts etc. The life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). Some trusts are set up so that on the death of the Life Tenant, the trust assets remain held in discretionary trusts for a range of beneficiaries. Most Life Interest Trusts are created by Will. Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. 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. CGT may be payable on the transfer of assets into or out of IIP trusts, but it may be possible to defer CGT in some circumstances. Gifts into these trusts were potentially exempt transfers (PETs) rather than CLTs. 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. The trustees have the power to pay income and often capital to the life tenant. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. The trustees are a separate entity for Capital Gains Tax purposes and are liable to pay tax on any gains they make over and above the trusts annual allowance. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. 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. For example, where there is a life tenant entitled to income during their life and a second class (the remaindermen) entitled to capital on the death of the life tenant, then it would be unfair to the life tenant if the trustees were to invest in assets which produced little or no income, but offered the prospect of greater than usual capital growth. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in trust. 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. This is a bit niche! The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. The most common example of enjoying property is the right to reside in a house. Lionels life interest will qualify as an IPDI. Where the liability falls on the trustees, the trust rate applies. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. IIP trusts may be created during lifetime or on death. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. 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. They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. The trustees are initially be taxed on the trust income because they receive it (though see later section on mandating income to the beneficiary). Trust income paid directly to the beneficiary will be taxed at their rates. a new-style life interest, i.e. In 2017 HMRC set up the Trust Registration Service. Therefore, providing that changes in the holders of the IIP take place on death then these provisions allow all subsequent holders to be treated under the pre 22 March 2006 rules. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. As a consequence, new, flexible insurance company trusts (other than bare trust) created on or after 22 March 2006, even if expressed in terms of IIP trusts, are taxed under the relevant property regime. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. Removing or resetting your browser cookies will reset these preferences. As a result, S46A IHTA 1984 was introduced. Trustees Management Expenses (TMEs) are however different. Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. The implications of this are outlined below. The relevant legislation is S49(1A) and S58(1) IHTA 1984. Trial includes one question to LexisAsk during the length of the trial. This means that the trust property will be treated as forming part of their estate for IHT purposes whereas otherwise the relevant property regime would have applied. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. Any reference to legislation and tax is based on abrdns understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. In the case of life interest trusts where different beneficiaries are entitled to income or capital they will need to act fairly between the different classes. The spousal exemption will apply to these funds passing on Kirsteens death. This site is protected by reCAPTCHA. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. To discuss trialling these LexisNexis services please email customer service via our online form. Assume the value of those shares increase through capital growth, post 2006. A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . If a Life Tenant of the trust is occupying a property owned by the trustees then the trust can mitigate Capital Gains Tax that may arise on the sale of the property by using the main residence relief provisions. The trust itself will also be subject to periodic and exit charges. How is the income of an interest in possession trust taxed? Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. . No chargeable gain for CGT will arise on the termination of a life interest as a result of the death of a life tenant with a pre-22 March 2006 interest in possession. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. Beneficiaries receiving distributions from a trust are entitled to a tax credit for the rate tax paid (or effectively paid) by the trustees in respect of rental, savings income or dividend income. If an individual transfers property into a trust, that is a disposal by the settlor at market value even if the settlor retains an interest. Typically, the surviving spouse is given the right to trust income for their lifetime (or the right to occupy the marital home) with the capital passing on death to designated children. The trusts were not subject to the relevant property regime of periodic and exit charges. What is the CGT treatment of an interest in possession trust? As Sally is now 25 and earning her own living, the trustees would like to consider benefiting other members of the family and terminating her life interest. For tax purposes, the Life Tenant has an Interest in Possession. The magistrates court may decline jurisdiction where for example in cases involving a weapon/throwing objects, or conduct that causes serious, Qualifying interest in possession trustsIHT treatment, Art and heritage property, landed estates and farming families, Family businesses and ownership structures, Pensions, insurance and tax efficient investments, Tax avoidance, evasion and non-compliance, Taxation of trustsincome tax and capital gains tax, Draft Finance Bill 2016the residence nil rate band, High Courts rectification of deeds decision consistent with other recent decisions (A and others v D and others), No rewriting historythe flexibility of Jerseys remedies for mistake and inadequate deliberation (Representation of The Grundy Trust), Wealth Tax Commissiona wealth tax for the UK final report. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? Your choice regarding cookies on this site, Gifting the family home? At least one beneficiary will be entitled to all the trust income. She has a TSI. An interest in possession in trust property exists where . The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. The house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. Life Interest Trust where a beneficiary is given an interest in trust assets for their lifetime, usually the entitlement to receive income, and/or live in a property owned by the trust. The trustees may be able to jointly elect with the relevant beneficiary for gains to be held over if the asset is either a 'qualifying business asset' or the trust 'qualifies' (mainly lifetime IIP trusts created after 21 March 2006). Google Analytics cookies help us to understand your experience of the website and do not store any personal data. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. Assume Ginas free estate simply comprised cash in the bank of 90,000, Assume the house that Gina lived in under the IIP trust was valued at 2,500,000, Step 3 there will be a double NRB but no RNRB as the house is not passing to direct descendants. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. The income, when distributed to them, retains its source nature, for example, dividend or interest. 22 March 2006 is a key date regarding the taxation of IIP Trusts. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. The relief can also be claimed if the gift is of business assets. The trust will also set out who is entitled to the capital, and when. Evidence. Certain expenses will be deductible when calculating profits (e.g. Holdover relief is not available where the settlor, their spouse/civil partner or their minor (under 18) unmarried child can benefit from the trust (these are known as 'settlor interested' trusts). Once the IHT estate charge has been calculated, the trustees of the interest in possession trust will be responsible for paying that part of the tax that relates to the settled property. 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. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. There are special rules for life policy trusts set out later. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. 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. Even so, the distribution remains income for tax purposes. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. Taxation of the Assets held in the IPDI Trust.