* Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. 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 ). The person with the IIP has an earlier interest. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. An interest in possession in trust property exists where . Human Trafficking & Modern Slavery Statement. On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . A closer look at when a beneficiary has a life interest in the income of a trust fund. The relief can also be claimed if the gift is of business assets. If the Life Tenants interest is brought to an end during their lifetime but the trust assets remain held on discretionary trusts, the Life Tenant will be deemed to have made an immediately chargeable transfer for Inheritance Tax and the trust will pay tax at a rate of 20% on the value of trust assets exceeding the Nil Rate Band (currently 325,000 in 2021-22). There are two classes of beneficiary actual and potential - with the trustees having the power to replace an actual beneficiary with anyone from the list of potential beneficiaries. 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. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. The trustees are only entitled to half the individual annual CGT exempt amount. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. 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. 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. We use cookies to optimise site functionality and give you the best possible experience. 22 March 2006 is a key date regarding the taxation of IIP Trusts. 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. 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. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. Instead, the value of the trust will form part of the life tenant's taxable estate on their death. Lionels life interest will qualify as an IPDI. Kirsteen who is married to Lionel has three children from a previous relationship. Interest in Possession trust (IIP): The beneficiaries, sometime referred to as life-tenants are absolutely entitled to the income of the trust as it arises (net of income tax and the income expenses of the trust). Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. Understanding interest in possession trusts. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. There are no capital gains tax consequences for lifetime gifts involving cash or existing bonds. They can do so, by terminating part of Sallys cousins interest and appointing Sally a new life interest in that part of the trust fund. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. This could be in favour of Sallys cousin, who will have a revocable life interest. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. The trustees are initially be taxed on the trust income because they receive it (though see later section on mandating income to the beneficiary). A FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried 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. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. 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. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. The beneficiary with the right to enjoy the trust property for the time being is said . The Google Privacy Policy and Terms of Service apply. Assume that the trustees opted to give Sallys cousin a revocable life interest. The term IIP is not defined in tax legislation. on attaining a specified age or event). HMRC will effectively treat the addition as a new settlement. Example 1 This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. Will payments be treated as 'same-day additions' under IHTA 1984, s 62A, for the purpose of calculating ongoing IHT charges on pilot trusts, where an employee is a member of a contractual contributory pension scheme and that employee has requested that the administrators divide funds to several pilot trusts set up by that employee on different days during his lifetime so that the total funds in each pilot trust remains under the IHT nil rate band? Even if the trustees have a power of appointment, and can terminate the original life tenants interest if they so desire, they will be outside the scope of the relevant property regime. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. 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. Clearly therefore, it is not always necessary for the trust property to produce income. Even so, the distribution remains income for tax purposes. This will also be an immediately chargeable transfer and Janes income interest will be in the relevant property regime (contrast this with the termination of Toms interest in favour of Jane on death, which would be spouse exempt, with Jane taking a TSI). Replacing the IIP beneficiary with an absolute interest. allowable letting expenses in a property business). Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. We may terminate this trial at any time or decide not to give a trial, for any reason. The requirement for the trustees to act fairly in making investment decisions with different consequences for different classes of beneficiaries is regarded as preferable to the traditional image of holding scales equally between the income beneficiary and the remainderman. The trust is not subject to the relevant property regime. The content displayed here is subject to our disclaimer. There are special rules for life policy trusts set out later. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. This element requires third party cookies to be enabled. Where trustees want to utilise holdover relief, they must take care not to pass assets to a beneficiary within the first three months of the trust being created, or within the first three months following a ten yearly IHT charge. This would not be a PET by Sally as she has no beneficial entitlement to the property in which the interest subsists and the trust fund does not leave the relevant property regime, so there is no exit charge. To discuss trialling these LexisNexis services please email customer service via our online form. As a result, S46A IHTA 1984 was introduced. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. 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. Otherwise the trustees if the trust is UK resident. Do I really need a solicitor for probate? A full Life Interest Trust would arise if the husbands Will provided that his wife should benefit not only from the right to live in their family home, but also from the income generated if the property is sold and the proceeds invested. Immediate Post Death Interest arises from an Interest In Possession (IIP) Trust created by a Will. It is not to be treated as a substitute for getting full and specific advice from Wards. 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. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. Please share this article with your clients. This can be beneficial particularly where the intended life tenants marginal rate of tax is 40 per cent or lower, in contrast to the increased 50 per cent rate for trustees of discretionary trusts, which will apply after 6 April 2010. The Will would then provide that the property passes to the children. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. 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. 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. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. She is AAT and ATT qualified and is currently studying ACCA. 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). The trustees will acquire assets at their market value at the date of death. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. Immediate Post Death Interest. 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). Interest in Possession (IIP) when a beneficiary has a present right of present enjoyment in the net income of the Trust property without any further decision of the trustees being required. 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. There are, of course, other ways in which an Immediate Post Death Interest can be used. Example of a post 5 October 2008 death of spouse giving rise to a TSI. A tax efficient flexible arrangement was therefore obtained. Either a premium was paid on or after 22 March 2006 or an allowed variation is made to the contract on or after that day. Income received by the Trust should strictly be declared by the Trustees. Prior to the IHT changes to trusts on 22 March 2006, it was common practice to use a form of IIP trust with life policies, including investment bonds. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. IIP trusts are quite common in wills. a trust), the income arising is treated as the settlors income for all tax purposes. When a chargeable event occurs any gain will be assessed to income tax on: * The liability remains with the settlor throughout the tax year of their death. The settlor has the right to reclaim any tax they suffer from the trustees, and while they have this right it will be included in their estate for IHT. 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, as mentioned above, the life tenant will have no control over where the trust assets will pass after . The trust itself will also be subject to periodic and exit charges. If the trust comes to an end on the death of the Life Tenant, again the capital value of the trust will be aggregated with the Life Tenants estate to calculate Inheritance Tax due. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). Removing or resetting your browser cookies will reset these preferences. She was widowed twice and was left the right to live in her 2nd husbands house on his death (i.e. Also bear in mind that the rates below will apply to the trustees regardless of the level of income and therefore tax bands do not apply. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. If the property is sold, the beneficiary will not be entitled to receive the income from the invested proceeds, so the trust is not a full Life Interest Trust. Or this could be carried out in favour of Sallys cousin absolutely, which gives rise to an exit charge assessable on the trustees, as the assets in the trust fund are leaving the settlement (assuming no available reliefs). The IHT liability is split between Ginas free estate and the IIP trustees as follows. Note that a Capital Redemption policy is not a life insurance policy. They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. 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. Example of IHT arising on death of the income beneficiary. Top-slicing relief is available. Moor Place Lodge? Property in which a QIIP subsists is not relevant property so it is not subject to principal and exit charges during the life of the trust. Life Interest Trusts are most commonly used to create and protect interests in a property. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. 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). This allows the trustees to invest in life policies, such as investment bonds. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. 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 example, they can take into account the income needs of the life tenant or the fact that the tenant was a person known to the settlor and a primary object of the trust whereas the remainderman might be a remoter relative. Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. Therefore they are not taxed according to the relevant property regime, i.e. It will not become subject to the relevant property regime. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. 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. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. The spousal exemption will apply to these funds passing on Kirsteens death. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). This means that on Peter's death, the assets of the trust will pass automatically to his daughter. Harry has been life tenant of a trust since 2005. It is a register of the beneficial ownership of trusts. The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime. 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. In valuing the trust property the related property rules will apply. 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. It can also apply to cases with a TSI. 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. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. At least one beneficiary will be entitled to all the trust income. 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. The value of tax reliefs to the investor depends on their financial circumstances.
