Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. On Lionels death the trust fund will be inside his IHT estate. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. The spousal exemption will apply to these funds passing on Kirsteens death. A tax efficient flexible arrangement was therefore obtained. 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. The trust has not qualified as a trust for bereaved minors or a disabled person's interest since the IIP began. 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. A life interest trust (also known as "an interest in possession trust") is an arrangement recognised by English law under which someone is given the right to use an asset (usually a house) for the rest of their life without ever becoming the owner of the underlying capital. The trust fund is within the IHT estate of Harriet. If investment income is not mandated to the beneficiary then the trustees are liable for income tax at the basic rate regardless of how much or how little income arises. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. The IHT is calculated as follows: . You can learn more detailed information in our Privacy Policy. The content displayed here is subject to our disclaimer. Any investments owned by the trustees should be carefully managed to reduce this tax burden. Instead, a single premium policy with the ability for the individual to make further premium payments (increments) would also be covered meaning that those premiums can continue to enjoy PET treatment. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. Interest in possession (IIP) is a trust law principle that has UK taxation implications. 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. Most Life Interest Trusts are created by Will. 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. In the past, IIP trusts were subject to estate duty when the beneficiary died. Clearly therefore, it is not always necessary for the trust property to produce income. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. 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. However, trustees will not be able to deduct any expenses from mandated income. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. 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. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. The trust will also set out who is entitled to the capital, and when. Kia also has experience of working in industry. These may be subject to change in the future. Understanding interest in possession trusts. There are no capital gains tax consequences for lifetime gifts involving cash or existing bonds. Once the trust is created the trustees will be the legal owners of any trust assets and investments. The income beneficiary has a life interest or life rent. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. S8H (2) IHTA 1984 defines a qualifying residential interest as an interest in a dwelling-house which has been that persons residence at some time in their ownership. Trustees must hold the balance fairly between different categories of beneficiary. The implications of this are outlined below. Income received by the Trust should strictly be declared by the Trustees. 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. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. Other assets transferred into trust while the settlor is still alive will be a disposal for CGT with any gain being assessed on the settlor. 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. on attaining a specified age or event). 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. This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. 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. Examples of this are where the IIP beneficiary is a spouse, civil partner or minor child of the settlor. The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. While the life tenant is alive, the trust is treated as an interest in possession trust. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Authorised and regulated by the Financial Conduct Authority. 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 . 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. IIP trusts may be created during lifetime or on death. Top-slicing relief is not available for trustees. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. The CGT death uplift is available on Harrys death and Wendys death. 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. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). Example of a post 5 October 2008 death of spouse giving rise to a TSI. She has a TSI. There is an exception for disabled person's trusts. 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. They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. 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 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). For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. 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 annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). Change your settings. 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. Replacing the IIP beneficiary with a new IIP beneficiary on or after 6 October 2008 will be a chargeable lifetime transfer (and may therefore incur a lifetime charge of 20% depending on the value) from the beneficiary that has been replaced. Example 1 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 personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. The technology to maintain this privacy management relies on cookie identifiers. There are special rules for life policy trusts set out later. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. 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. 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. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. If the death occurs on or after 6 October 2008 and a spouse or civil partner then becomes entitled to the IIP then the spouse's interest will be known as a TSI. Registered number: 2632423. What else? This is a right to live in a property, sometimes for life, but more often for a shorter period. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. The beneficiary both receives the income and is entitled to it. 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. Prudential Distribution Limited is registered in Scotland. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. This element requires third party cookies to be enabled. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom. In contrast, because of the inheritance tax charge that may arise on the lifetime termination of a qualifying interest in possession onto continuing trusts, even when in favour of a spouse/civil partner, trustees will need to think carefully before taking action. 22 March 2006 is a key date regarding the taxation of IIP Trusts. The trust fund is within the IHT estate of Jane. Discretionary trust (DT): . Please share this article with your clients. Although they are part of a team, they also, AffrayAffray is an offence created by the Public Order Act 1986 (POA 1986). This website describes products and services provided by subsidiaries of abrdn group. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. 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. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. 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 TSIs apply to IIP trusts commencing before 22 March 2006. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. 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. For completeness, note that a PET can arise on or after 22 March 2006, for lifetime gifts into a bereaved minor's trust on the coming to an end of an IPDI. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime.