Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. This type of IIP is known as an immediate post death interest or IPDI. Flexible Life Interest Trust A Life Interest Trust where the trustees are given powers to advance capital from the trust to beneficiaries, including the Life Tenant, during their lifetime. A step child includes the child of a civil partner. There are special rules for life policy trusts set out later. There are, of course, other ways in which an Immediate Post Death Interest can be used. This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. 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. Moor Place Lodge? For UK financial advisers only, not approved for use by retail customers. 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. All rights reserved. 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. Remember that personal allowances are available to individuals only and not to trustees. Trial includes one question to LexisAsk during the length of the trial. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. Therefore they are not taxed according to the relevant property regime, i.e. Signatureless process for onshore bonds content, Heritage servicing and new business tracking, Interest in Possession (IIP) Trusts Taxation, What you need to know about Interest in Possession trusts, Lifetime gifts into IIP trusts prior to 22 March 2006, TSI (1) The transitional period to 5 October 2008, TSI (2) Surviving spouse or civil partner trusts, Adding property to a pre 22 March 2006 trust, Adding value to a pre 22 March 2006 trust, important information about trusts document. 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. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. Regular withdrawals from a bond may erode the capital payable to the remaindermen on the life tenants death and withdrawals could be taxed as income by HMRC. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. 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. 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 relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. 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. Assets transferred to trust on the settlor's death will not normally result in a CGT charge. a trust), the income arising is treated as the settlors income for all tax purposes. [4] by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. 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. 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. Information as to whether trustees can buy a bond and who is assessed for the tax on a chargeable event gain on a bond in trust is contained in our important information about trusts document. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). 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 . 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. 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. . Wards Solicitors is a trading name of Wards Solicitors LLP which is a limited liability partnership registered in England and Wales (registered number OC417965) and authorised and regulated by the Solicitors Regulation Authority under number 646117. The value of the trust formed part of the estate of the IIP beneficiary. Clearly therefore, it is not always necessary for the trust property to produce income. 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). Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. 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. Instead, the value of the trust will form part of the life tenant's taxable estate on their death. 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. Interest in possession (IIP) is a trust law principle that has UK taxation implications. 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. A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . 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. This is still the position for IIP trusts which retain that IIP status. Other beneficiaries do not. The main CGT rate for trustees and personal representatives is currently 20% though there is a 28% rate for gains on residential property not eligible for private residence relief. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. This will both save the deceased's family time and help to avoid the estate tax. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. 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. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. This is a right to live in a property, sometimes for life, but more often for a shorter period. It is a register of the beneficial ownership of trusts. Victor creates an IIP trust where his three children are life tenants. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. If however the stocks and shares have been mixed, then an apportionment will be required. Where the liability falls on the trustees, the trust rate applies. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. 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. Trustees must hold the balance fairly between different categories of beneficiary. 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 spousal exemption will apply to these funds passing on Kirsteens death. This will bring the trust into the relevant property regime. Indeed, an IIP frequently exist in assets that do not produce income. She remains the current life tenant of the trust. 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. Removing or resetting your browser cookies will reset these preferences. 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. In contrast bonds are non-income producing investments and withdrawals are a return of capital not income. 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. These TSIs apply to IIP trusts commencing before 22 March 2006. 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. 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. Gordon has had a life interest (the prior interest) under an IIP trust since 1 July 2000. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. 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. 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. Sign-in For tax purposes, the Life Tenant has an Interest in Possession. Assume that the trustees opted to give Sallys cousin a revocable life interest. There is a chargeable transfer by the deceased unless the IIP is for the spouse or civil partner in which case it is an exempt transfer. The life tenant's interest may entitle them to income generated by trust assets, or it may allow them the use of the assets (for example, if a house is contained in the trust they might be granted the right to live in that house). Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? She remains the current life tenant of the trust. Immediate Post Death Interest arises from an Interest In Possession (IIP) Trust created by a Will. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in trust. Where value is added after 21 March 2006 this will not result in any of the trust fund becoming relevant property provided the addition is indeed solely of value and not and addition of property. 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) The beneficiary should use SA107 Trusts etc. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. 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. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. 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 means that the crystallisation of capital gains can be deferred until the asset transferred is realised by the trustees (or following a further holdover claim realised by a beneficiary). You can learn more detailed information in our Privacy Policy. Discretionary trust (DT): . The relief can also be claimed if the gift is of business assets. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of 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. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. Once the trust is created the trustees will be the legal owners of any trust assets and investments. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). Full product and service provider details are described on the legal information. Most trusts offered by product providers are not settlor interested. Life Interest Trusts are most commonly used to create and protect interests in a property. Would a revocable appointment of a real property out of a life interest trust to an individual (absolutely) pre-2006 have created an interest in possession for the appointee? Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. As on previous occasions Mary provided a totally professional, friendly and helpful service.. The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. 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. 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 . However . 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). No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. 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. Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. The CGT death uplift is available on Harrys death and Wendys death. The 2006 legislation introduced the concept of a TSI. At least one beneficiary will be entitled to all the trust income. We may terminate this trial at any time or decide not to give a trial, for any reason. 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? However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. It will not become subject to the relevant property regime. 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).