Your choice regarding cookies on this site, Gifting the family home? The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. The IHT treatment of an IIP trust depends on whether it is created during lifetime or on death. The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. My VIP Tax Team question of the week: Mixed Partnerships, My VIP Tax Team question of the week: Associated Company rules from 01.04.23, My VIP Tax Team question of the week: PPR & Transfers. 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. Therefore, if the IIP terminates or the beneficiary disposes of his/her IIP then a PET arises if the property passes to another individual absolutely. 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. 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. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. 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 remainderman of the IIP trust is Peters' daughter. 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. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. 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. 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 income tax treatment will depend on whether the trust income is mandated directly to the beneficiary(ies) or is paid to them via the trust. The trust has not qualified as a trust for bereaved minors or a disabled person's interest since the IIP began. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plcwhich is a holding company registered in England and Wales with registered number 11444019 andregistered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. Often, trust income will be paid direct to the Life Tenant without passing through the hands of the Trustees. Third-Party cookies are set by our partners and help us to improve your experience of the website. For UK financial advisers only, not approved for use by retail customers. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. 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. 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. These are known as 'flexible' or 'power of appointment' trusts. 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. 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. This postpones the gain until the beneficiary ultimately disposes of the asset. Free trials are only available to individuals based in the UK. If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. A TSI can also arise with life insurance trusts. If a settlor sets up two discretionary trusts several years apart for different groups of beneficiaries, does each trust have its own nil rate band for the purposes of the principal and exit charges under the relevant property regime (assuming there have been no other potentially exempt transfers or lifetime chargeable transfers)? 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. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. 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.). Interest In Possession & Resident Nil-Rate Band. Any investments owned by the trustees should be carefully managed to reduce this tax burden. These cookies enable core website functionality, and can only be disabled by changing your browser preferences. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. The trusts were not subject to the relevant property regime of periodic and exit charges. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. 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. 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. 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. Beneficiaries can use their personal allowance, savings rate band, personal savings allowance and dividend allowance where available against trust income. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. 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. 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. These are usually referred to as life interest trusts (or life rent in Scotland). 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. For example, it may allow them to live rent free in a residential property owned by the trust. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. The spousal exemption will apply to these funds passing on Kirsteens death. 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. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. 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 means that on Peter's death, the assets of the trust will pass automatically to his daughter. Once the trust is created the trustees will be the legal owners of any trust assets and investments. Click here for a full list of third-party plugins used on this site. HMRC will effectively treat the addition as a new settlement. Instead, the value of the trust will form part of the life tenant's taxable estate on their death. For tax purposes, the inter-spouse exemption applied on Ivans death. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. 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. She remains the current life tenant of the trust. IIP trusts will need to be entered on the HMRC trust register if they have income that is not mandated directly to the life tenant, or capital gains from disposals. In essence this is an administrative shortcut. The trust will also set out who is entitled to the capital, and when. Someone who holds an IIP in property that was settled before 22 March 2006 is treated as if they owned the settled property, but, Someone who holds an IIP in property settled on or after 22 March 2006 is not generally treated as owning it; and that property will typically fall under the relevant property regime, Interest received from Open Ended Investment Companies (OEICs) or from banks/building societies, is received gross and taxable on the trustees at 20%, Rental profits after allowable expenses are also taxed at 20%, Trustees receive gross interest of 1,000 on which they pay tax at 20% of 200, The beneficiary receives 800 from the trustees, The beneficiary is entitled to the gross amount 1,000, and is taxable on that amount, The beneficiary is given credit for the 200 tax paid by the trustees, If the beneficiary is a higher rate taxpayer further tax will be payable, If the beneficiary is a non- taxpayer then a repayment claim will be possible, is not settlor interested but the trust income passes directly to the settlors relevant minor child. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. 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. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. 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. 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? However the tax treatment of the trust is very similar to that of a full Life Interest Trust. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. IIP trusts are quite common in wills. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. The following Private Client practice note produced in partnership with Paul Davies of Clarke Wilmott LLP provides comprehensive and up to date legal information covering: 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), on the death of the beneficiary (life tenant) within seven years after a transfer or lifetime termination of their interest, on the transfer or conversion of the interest to a non-qualifying or discretionary interest. Sign-in The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. Therefore a more detailed review of your particular circumstances would be required before a definitive answer could be provided. This site is protected by reCAPTCHA. Trustees need to be mindful that investments should be suitable. The implications of this are outlined below. 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. e.g. Such transfers are not regarded as chargeable lifetime transfers for IHT, and consequently holdover relief won't apply unless the transfer is of business assets. Therefore they are not taxed according to the relevant property regime, i.e. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. 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. 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. Example of a post 5 October 2008 death of spouse giving rise to a TSI. Investment bonds should not be used to provide an income to a life tenant (e.g. The payment of ongoing premiums or the exercise of an existing policy option to increase the benefit or extend the term does not cause a problem. 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. 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. This Fact Sheet has been prepared to provide you with basic information. 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. Example 1 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. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). Victor creates an IIP trust where his three children are life tenants. Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. Assets transferred to trust on the settlor's death will not normally result in a CGT charge. Many Trusts hold property that is known as 'relevant property'. 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. In valuing the trust property the related property rules will apply. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. 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. She was widowed twice and was left the right to live in her 2nd husbands house on his death (i.e. You can learn more detailed information in our Privacy Policy. However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . To discuss trialling these LexisNexis services please email customer service via our online form. 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? There is greater flexibility in the regime for the trustees to vary interests in income without incurring any tax charge, as such interests are not within the charge on termination by virtue of section 52(2A). Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. [4] Top-slicing relief is not available for trustees. 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. 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. This is because the trust is subject to IHT in their estate. Kirsteen who is married to Lionel has three children from a previous relationship. If so, it means that the beneficiary receives it and the trustees do not. Holdover relief is not available where the settlor, their spouse/civil partner or their minor (under 18) unmarried child can benefit from the trust (these are known as 'settlor interested' trusts). We may terminate this trial at any time or decide not to give a trial, for any reason. Rules introduced on 6 October 2020 extend . 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. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. CONTINUE READING This can make the tax position complex and is normally best avoided. 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. 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 life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). Most trusts offered by product providers are not settlor interested. 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. Do I really need a solicitor for probate? a new-style life interest, i.e. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. 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. Note that a Capital Redemption policy is not a life insurance policy. 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. This regime is explored here. . For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. Tax is then payable by the beneficiary when he or she finally disposes of the asset, and the acquisition cost is reduced by the amount of the held-over gain. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. Because a life tenant with a qualifying interest in possession is treated as being beneficially entitled to the property 'in which the interest subsists' (section 49 (1)), its termination results in a loss to the life tenant's inheritance tax estate and is a transfer of value (section 52). From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. Indeed, an IIP frequently exist in assets that do not produce income. This could happen either because they have the authority to make discretionary distributions of capital or where a beneficiary becomes entitled to the trust capital (e.g. Any change to an IIP beneficiary of a pre-22 March 2006 trust will affect the IHT position of the trust as follows: Replacing the IIP beneficiary with a new IIP. Life Interest Trusts are most commonly used to create and protect interests in a property. A FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. 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. 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. Lionels life interest will qualify as an IPDI. 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. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. We do not accept service of court proceedings or other documents by email. 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. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. Where the beneficiary has received income from the trustees net of tax, then to arrive at the correct measure of income, the net income is grossed up since the beneficiary is entitled to, and taxable on, the gross amount. She has a TSI. 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. 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. Income received by the Trust should strictly be declared by the Trustees. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. 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). The income beneficiary has a life interest or life rent. 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. The beneficiary should use SA107 Trusts etc. It is a register of the beneficial ownership of trusts. Two of three children are minors. 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. This is a right to live in a property, sometimes for life, but more often for a shorter period. S8K IHTA 1984 defines a direct descendant as the deceased persons child, grandchild or other lineal descendant, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner), a child who is, or was at any time, their step-child, their adopted child, a child who was fostered at any time by them, a child where theyre appointed as a guardian or special guardian when the child is under 18. Issue of redeemable sharesA limited company that proposes to issue redeemable shares must comply with the provisions of the Companies Act 2006 (CA 2006).Why do companies issue redeemable shares?A company may wish to issue redeemable shares so that it has an alternative way to return surplus capital, Amending the articles of associationThis Practice Note summarises the procedure to amend or change a companys articles of association in accordance with the Companies Act 2006 (CA 2006).Why amend the articles?There are many different reasons why a company may want, or be required, to amend its, Working with counselInstructing counsel to advocate on a clients behalf should be a matter of careful thought and preparation.