22 March 2006 is a key date regarding the taxation of IIP Trusts. Victor creates an IIP trust where his three children are life tenants. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. The content displayed here is subject to our disclaimer. For UK financial advisers only, not approved for use by retail customers. Also, in cases where one beneficiary is entitled to income and others entitled to capital, then the trustees could diversify the trust fund, perhaps by investing in a mixture of OEICs to suit the income needs of one beneficiary, and insurance bonds to provide capital for the others. The implications of this are outlined below. In correspondence with The Chartered Institute of Taxation, HMRC stated: The beneficiary should return all income on the relevant pages of their tax return, in addition to their direct personal income. These TSIs apply to IIP trusts commencing before 22 March 2006. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. If the Life Tenant dies within 7 years of the termination of the trust, the PET will be aggregated with their own estate for calculation of Inheritance Tax. 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 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. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? Most Life Interest Trusts are created by Will. 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. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. 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. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. 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. 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. It is a register of the beneficial ownership of trusts. The trust is not subject to the relevant property regime. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. A life interest Will trust (also known an interest in possession trust) will need to be registered with HMRC, even where the life tenant receives all income, including it on their own tax return. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. Discretionary trust (DT): . She has a TSI. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. 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. There are special rules for life policy trusts set out later. Top-slicing relief is not available for trustees. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. Top-slicing relief is available. Registered number: 2632423. If a settlor sets up two discretionary trusts several years apart for different groups of beneficiaries, does each trust have its own nil rate band for the purposes of the principal and exit charges under the relevant property regime (assuming there have been no other potentially exempt transfers or lifetime chargeable transfers)? These rules were abolished as they were no longer considered necessary. Gina has recently passed away. 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. 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. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. The IHT treatment of an IIP trust depends on whether it is created during lifetime or on death. This is because there needs to be a disposal of property to create a settlement (S43(2) IHTA 1984) and an addition of value doesnt result from a disposal of property. Where an individual wishes to settle part of their property on a life interest trust for themselves during their lifetime (which will be an immediately chargeable transfer and will not be a QIIP), how can they ensure they settle only the value of the available nil rate band of 325,000? The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. 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. on attaining a specified age or event). This will both save the deceased's family time and help to avoid the estate tax. 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. 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 this case, the Life Tenant may declare income received direct by them on their own tax return and the Trustees would not include it on the Trust tax return. It can also apply to cases with a TSI. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. The value of the trust formed part of the estate of the IIP beneficiary. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. Making a lifetime appointment from an IIP beneficiary to another beneficiary absolutely will be a PET by the outgoing beneficiary (or an exempt transfer if the interest passes to the spouse or civil partner) whether this is done before or after 6 October 2008. Where the life interest in the trust begins immediately after the death of the person creating the trust then it is called an Immediate Post-Death Interest in possession trust (IPDI) by H M Revenue and Customs. Click here for a full list of third-party plugins used on this site. 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. Assume that the trustees opted to give Sallys cousin a revocable life interest. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). The trustees will acquire assets at their market value at the date of death. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. You can learn more detailed information in our Privacy Policy. The trust itself will also be subject to periodic and exit charges. 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.). an income interest in possession within the relevant property regime in Chapter III IHTA 1984. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. allowable letting expenses in a property business). The person with the IIP has an earlier interest. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. In her will she includes a provision stating that her estate will pass to trustees where Lionel will have a life interest (entitled to income) and on his death the capital will pass absolutely to her three children. These are known as 'flexible' or 'power of appointment' trusts. A closer look at when a beneficiary has a life interest in the income of a trust fund. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. HMRC will effectively treat the addition as a new settlement. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. 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. 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 . by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. 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 Understanding interest in possession trusts. 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 most common example of enjoying property is the right to reside in a house. However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). The return earned on funds which have been loaned or invested (ie the amount a borrower pays to a lender for the use of their money). It is not to be treated as a substitute for getting full and specific advice from Wards. e.g. When making investments, the trustees have responsibilities to both the life tenant and the beneficiaries entitled to capital, and must take account of the interests of both when choosing where to invest, unless the trust says otherwise. The technology to maintain this privacy management relies on cookie identifiers. The trust will also set out who is entitled to the capital, and when. S629 does not apply to a childs trust income in any tax year if, in that year, the total amount of income does not exceed 100. We do not accept service of court proceedings or other documents by email. The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). How is the income of an interest in possession trust taxed? If however the stocks and shares have been mixed, then an apportionment will be required. Equally, it would be unfair to the remaindermen if the trustees were to make investments which offered a high income but little or no capital growth, or which led to the value of the capital being eroded. However, this exemption is shared equally between all trusts created by the same settlor, subject to a minimum of one fifth of the trust exemption. While the life tenant is alive, the trust is treated as an interest in possession trust. If so, it means that the beneficiary receives it and the trustees do not. 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. Does it make any difference how many years after the first trust that the second trust is settled? On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). Authorised and regulated by the Financial Conduct Authority. Gordon has had a life interest (the prior interest) under an IIP trust since 1 July 2000. It is not normal for the life tenant to be one of those beneficiaries, but the trust may allow trustees to appoint capital to them. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. She remains the current life tenant of the trust. The new beneficiary will have a TSI. 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. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. 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. 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. 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. Gifts into these trusts were potentially exempt transfers (PETs) rather than CLTs. For tax purposes, the inter-spouse exemption applied on Ivans death. Certain expenses will be deductible when calculating profits (e.g. Income received by the Trust should strictly be declared by the Trustees. 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 remainderman of the IIP trust is Peters' daughter. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. It grants the life tenant ownership of property without having to include it in the will as part of their assets. 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. 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. There is greater flexibility in the regime for the trustees to vary interests in income without incurring any tax charge, as such interests are not within the charge on termination by virtue of section 52(2A). Where an individual becomes absolutely entitled to trust property during his or her Lifetime, the trustees will be treated as making a chargeable disposal for CGT. 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. Where the liability falls on the trustees, the trust rate applies. Clearly therefore, it is not always necessary for the trust property to produce income. The trustees will not have to supply all the income details onSA900and may even request to be taken out of the Self-Assessment regime for future years. As a result, S46A IHTA 1984 was introduced. The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. These beneficiaries are referred to as the remaindermen. The Trustees do not qualify for a dividend allowance or savings allowance. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. Removing or resetting your browser cookies will reset these preferences. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. 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 . You will not appear to benefit from the residence nil-rate band (RNRB) as the interest is not going to direct descendants, but initially into trust for your spouse. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. Change your settings. 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. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. The settlor of a settlor interested IIP gets no relief for TMEs. Example of IIP beneficiary being a minor child of the settlor. 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. 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). This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. 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. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. 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. The life tenant has a life interest and remainderman is the capital . Existing user? On trust for such of my wife, children and remoter issue as the trustees shall from time to time by deed or deeds revocable or irrevocable at their absolute discretion appoint and in default of any appointment for my children Edward and Fiona in equal shares absolutely. We use cookies to optimise site functionality and give you the best possible experience. This could be in favour of Sallys cousin, who will have a revocable life interest. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. These cookies enable core website functionality, and can only be disabled by changing your browser preferences. As on previous occasions Mary provided a totally professional, friendly and helpful service.. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. 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. These are usually referred to as life interest trusts (or life rent in Scotland). Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. The legislation for this is S624 ITTOIA 2005. For the avoidance of doubt, if the trustees have discretion or power to withhold the income from the income beneficiary, which can be exercised after income arises, then there cannot be an IIP. 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. Qualifying interest in possession Qualifying interest in possession (IIP) trusts are treated, for inheritance tax purposes, as though the assets belonged to the life tenant (see Practice note, Taxation of UK trusts: overview: Qualifying IIP trusts ). as though they are discretionary trusts. Trial includes one question to LexisAsk during the length of the trial. Where the settlor has retained an interest in property in a settlement (i.e. Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. For full details please see our information sheet on the taxation of Discretionary Trusts. Replacing the IIP beneficiary with an absolute interest. If the trustees dispose of trust assets (for example, if they sell a mutual fund or a property) the gains are calculated in the same way as for an individual and taxed at the trust rate of CGT. This continues to be the case for IIP trusts created before 22 March 2006 providing the income beneficiary is still in place though see Transitional Serial Interests below. Two of three children are minors. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. All transfers into IIP trusts on or after 22 March 2006 are treated as chargeable transfers and are taxed in the same way as relevant property trusts. The outgoing beneficiary should also be removed as a potential future beneficiary to avoid the transaction being regarded as a gift with reservation of benefit and still regarded as being in their estate. The 2006 legislation introduced the concept of a TSI. The trustees are only entitled to half the individual annual CGT exempt amount. If the trust is brought to an end during the Life Tenants lifetime so that the trust assets can be paid to other beneficiaries, the Life Tenant is treated as having made a Potentially Exempt Transfer (PET) for Inheritance Tax, equivalent to the capital value of the trust. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. Trustees Management Expenses (TMEs) are however different. However, trustees will not be able to deduct any expenses from mandated income. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. **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 trust fund is within the IHT estate of Harriet. The husbands Will would create a Life Interest Trust or Right of Occupation for his wife, so that she can live in the property for as long as she needs. As such, the property doesn't go through the probate process. The beneficiary should use SA107 Trusts etc. Otherwise the trustees if the trust is UK resident. Privacy notice | Disclaimer | Terms of use. 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). 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. This could happen either because they have the authority to make discretionary distributions of capital or where a beneficiary becomes entitled to the trust capital (e.g.