However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. 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. Certain expenses will be deductible when calculating profits (e.g. The income, when distributed to them, retains its source nature, for example, dividend or interest. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. a new-style life interest, i.e. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. This Fact Sheet has been prepared to provide you with basic information. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. The trust will also set out who is entitled to the capital, and when. 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 a life tenant of an 'old' interest in possession trust the trust property must be included in the deceased life tenant's death estate. Lionels life interest will qualify as an IPDI. IIP trusts are quite common in wills. Nevertheless, in its Capital Gains Manual HMRC state. Removing or resetting your browser cookies will reset these preferences. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. The settlor of a settlor interested IIP gets no relief for TMEs. For example, a husband owning the family home may want to make sure that his wife is able to remain living in the property after his death, even though the house itself has been left to their children. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. 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 beneficiary with the right to enjoy the trust property for the time being is said . While the life tenant is alive, the trust is treated as an interest in possession trust. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. The spousal exemption will apply to these funds passing on Kirsteens death. There are, of course, other ways in which an Immediate Post Death Interest can be used. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. 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. The IHT is calculated as follows: . The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. 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. 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. 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. 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. Immediate Post Death Interest. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. Copyright 2023 Croner-i Taxwise-Protect. 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. Click here for the customer website. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. 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. This element requires third party cookies to be enabled. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). 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. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. 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. She remains the current life tenant of the trust. There would have been no spousal exemption if the transfer on 1 March 2009 had been made while Ivan was still alive (because the relevant property regime rules would have applied). The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. Often, IPDI Trusts do not generate any income because the only trust asset is a house in which the Life Tenant lives. e.g. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. 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. The settlor names 'default' beneficiaries who are entitled to any trust income, and ultimately to capital when the trust ends unless the trustees exercise their powers to appoint capital during the life of the trust, or change the default beneficiaries. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. v. t. e. An interest in possession trust is a trust in which at least one beneficiary has the right to receive the income generated by the trust (if trust funds are invested) or the right to enjoy the trust assets for the present time in another way. 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. Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? 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. It grants the life tenant ownership of property without having to include it in the will as part of their assets. 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 If so, it means that the beneficiary receives it and the trustees do not. The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. 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. Trial includes one question to LexisAsk during the length of the trial. 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). Often, trust income will be paid direct to the Life Tenant without passing through the hands of the Trustees. 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. An interest in possession in trust property exists where . 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. The annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). Third-Party cookies are set by our partners and help us to improve your experience of the website. The value of tax reliefs to the investor depends on their financial circumstances. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. Any further gifts made to an interest in possession trust that was in force prior to 22 March 2006 will be treated as relevant property. For example, it may allow them to live rent free in a residential property owned by the trust. In other words, for IIPs arising after 21 March 2006, other than the categories of TSIs described above, the income beneficiary will only have the trust fund inside their estate where the interest is. This will both save the deceased's family time and help to avoid the estate tax. The trust itself will also be subject to periodic and exit charges. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. It will not become subject to the relevant property regime. On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). on attaining a specified age or event). 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. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. This site is protected by reCAPTCHA. Please share this article with your clients. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. Indeed, an IIP frequently exist in assets that do not produce income. A step child includes the child of a civil partner. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. 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. 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. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. 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 maximum rate of IHT for these charges will be 6% but in practice is often zero if the value of the trust remains below the available nil rate band. 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. 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. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. Example of a post 5 October 2008 death of spouse giving rise to a TSI. 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. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. The relief can also be claimed if the gift is of business assets. Existing user? Note that Table 1 refers to an 'accumulation and maintenance trust'. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs). This regime is explored here. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. Clearly therefore, it is not always necessary for the trust property to produce income. 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. Registered number: 2632423. 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. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. This remains the case provided there is no change to the IIP beneficiary. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Instead, a revaluation will occur, the trustees or new owner will be treated as acquiring the assets at the uplifted market value and any gain held over on the creation of the . . Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. 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. The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. 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. 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. 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. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI.