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. 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.). Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. Top-slicing relief is not available for trustees. These are usually referred to as life interest trusts (or life rent in Scotland). On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Clearly therefore, it is not always necessary for the trust property to produce income. 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. 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. Most trusts offered by product providers are not settlor interested. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. IIP trusts may be created during lifetime or on death. 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). 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. Where an IPDI trust has been set up and the surviving spouse or civil partner has the interest in possession, the RNRB of the deceased spouse can be transferred and will be available to the estate of the life tenant as long as the property is then left to the life tenant's direct descendants. 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. Where the liability falls on the trustees, the trust rate applies. This is because the trust is subject to IHT in their estate. 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. This will both save the deceased's family time and help to avoid the estate tax. 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. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. The beneficiary with the right to enjoy the trust property for the time being is said . 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. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. 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. But, if there is a clause in the trust deed giving the trustees power to pay capital to the life tenant then an insurance bond would therefore be a potential investment if the trustees so choose. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. Example 1 Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. 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). This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). 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. There are no capital gains tax consequences for lifetime gifts involving cash or existing bonds. 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. That income will retain its nature meaning that the tax due by the beneficiary will reflect the dividend nil rate allowance, the starting rate for savings income and the personal savings allowance as appropriate. 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. S8H (2) IHTA 1984 defines a 'qualifying residential interest' as an interest in a dwelling-house which has been that person's residence at some time in their ownership. 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. 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. Qualifying interest in possession trustsIHT treatment 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) If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. 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. 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. Discretionary trust (DT): . Often, IPDI Trusts do not generate any income because the only trust asset is a house in which the Life Tenant lives. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. 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. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. See Practice Note: The meaning of relevant property for details. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. What else? 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. Note however that an administrative power to withhold income to pay advice fees, or withhold income to pay for the upkeep and repair of a trust property would not affect the existence of an IIP. 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. 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. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. This does not include nephews, nieces, siblings, and other relatives. These may be subject to change in the future. For UK financial advisers only, not approved for use by retail customers. It grants the life tenant ownership of property without having to include it in the will as part of their assets. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. Trustees must hold the balance fairly between different categories of beneficiary. These beneficiaries are referred to as the remaindermen. Trustees need to be mindful that investments should be suitable. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. Indeed, an IIP frequently exist in assets that do not produce income. 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. This postpones the gain until the beneficiary ultimately disposes of the asset. How is the income of an interest in possession trust taxed? If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime. IIP trusts are quite common in wills. 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. Interest in possession (IIP) is a trust law principle that has UK taxation implications. 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. However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . Essentially, if the TSI rules apply in a given scenario, then the IIP that someone is becoming entitled to on or after 22 March 2006 will be taxed under pre 22 March 2006 rules. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. Remember that personal allowances are available to individuals only and not to trustees. 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. Assets transferred to trust on the settlor's death will not normally result in a CGT charge. 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). A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. 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. 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. It is not to be treated as a substitute for getting full and specific advice from Wards. 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. 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. 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. Multiple trusts - same day additions, related settlements and Rysaffe planning. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. 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. This is a bit niche! She has a TSI. Beneficiaries can use their personal allowance, savings rate band, personal savings allowance and dividend allowance where available against trust income. 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 CGT death uplift is available on Harrys death and Wendys death. Trusts for vulnerable beneficiaries are explored here. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. a trust), the income arising is treated as the settlors income for all tax purposes. 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 income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. Interest In Possession & Resident Nil-Rate Band. Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? Therefore they are not taxed according to the relevant property regime, i.e. Prudential Distribution Limited is registered in Scotland. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. **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 relief can also be claimed if the gift is of business assets. Tom has been the life tenant of the Tiptop family trust for more than 10 years. 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 . Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? 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. An OEIC generates income, albeit that with accumulation shares, income is not distributed but instead reinvested and added to capital. 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. 951415. The house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. 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. This remains the case provided there is no change to the IIP beneficiary. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. A guide for clients considering their options, Personal Injury Trusts things for you to think about, Tax treatment of Discretionary Trusts and Relevant Property Trusts, Trust Registration everything you need to know. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. In the past, IIP trusts were subject to estate duty when the beneficiary died. We may terminate this trial at any time or decide not to give a trial, for any reason. If the settlor does not wish to reclaim the tax from the trustees this could be seen as a further gift. Beneficiary the person who is entitled to benefit in some way from assets within a trust. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). Immediate Post Death Interest in Possession Trust (IPDI) when an IIP begins immediately after the death of the person who has created the trust in their Will. The assets of the trust were . We accept no responsibility for the content of these websites, nor do we guarantee their availability. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Click here for a full list of Google Analytics cookies used on this site. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. 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). 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. Trust income paid directly to the beneficiary will be taxed at their rates. HMRC will effectively treat the addition as a new settlement. 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. 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. A tax efficient flexible arrangement was therefore obtained. 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. An interest in possession in trust property exists where . Replacing the IIP beneficiary with an absolute interest. 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. Victor creates an IIP trust where his three children are life tenants. All rights reserved. This website describes products and services provided by subsidiaries of abrdn group. The life tenant has a life interest and remainderman is the capital . The most common example of enjoying property is the right to reside in a house. Do I really need a solicitor for probate? From 22 March 2006 there are only three types of new IIP qualifying trusts an Immediate Post Death Interest, a Disabled Persons Interest, or a Transitional Serial Interest. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. 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 ). Clearly therefore, it is not always necessary for the trust property to produce income. 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. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. 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. 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. 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. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs). 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. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. 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. We do not accept service of court proceedings or other documents by email. 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). To discuss trialling these LexisNexis services please email customer service via our online form. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. Trial includes one question to LexisAsk during the length of the trial. 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. For tax purposes, the inter-spouse exemption applied on Ivans death. Click here for a full list of third-party plugins used on this site. Registered number SC212640. 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. 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. There are, of course, other ways in which an Immediate Post Death Interest can be used. Kirsteen who is married to Lionel has three children from a previous relationship. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. As such, the property doesn't go through the probate process. Moor Place? allowable letting expenses in a property business). 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. 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. As outlined below, it is possible for trustees to mandate trust income to a beneficiary. 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. Only the additional gift will be in the new regime and not the whole trust fund. Harry has been life tenant of a trust since 2005. The trust fund is within the IHT estate of Harriet. Kia also has experience of working in industry. To control which cookies are set, click Settings. The income beneficiary has a life interest or life rent. A life estate is often created as a part of the estate planning process in the United States. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. Even so, the distribution remains income for tax purposes. 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. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. 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. Many Trusts hold property that is known as 'relevant property'. The beneficiary should use SA107 Trusts etc. It would generally be simpler to make further gifts to a new trust. For full details please see our information sheet on the taxation of Discretionary Trusts. During the lifetime of the Life Tenant, the Trust is not subject to 10 yearly charges or charges when an asset leaves the trust, unlike the tax treatment of Discretionary Trusts. There is an exception for disabled person's trusts. Please share this article with your clients. This site is protected by reCAPTCHA. 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. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . 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. 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. 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.

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