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. 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 further gifts made to an interest in possession trust that was in force prior to 22 March 2006 will be treated as relevant property. Evidence. 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 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. The 2006 legislation introduced the concept of a TSI. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. Thats relevant property. This Fact Sheet has been prepared to provide you with basic information. 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. 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. 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. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Understanding interest in possession trusts. Nevertheless, in its Capital Gains Manual HMRC state. This allows the trustees to invest in life policies, such as investment bonds. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? 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. This will bring the trust into the relevant property regime. Therefore, providing that changes in the holders of the IIP take place on death then these provisions allow all subsequent holders to be treated under the pre 22 March 2006 rules. A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . A step child includes the child of a civil partner. Life Tenant the beneficiary entitled to receive lifetime benefits from a Trust. Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. 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. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. 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 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, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. The income beneficiary has a life interest or life rent. We do not accept service of court proceedings or other documents by email. Trusts can be created by either the transfer of cash to the trustees, or by the transfer of an actual asset, such as an existing insurance bond or portfolio of shares/mutual funds. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. We use cookies to optimise site functionality and give you the best possible experience. Typically, the life tenant receives a right to enjoy the benefit of an asset until death, at which stage the asset passes to a remainderman. 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? Beneficiary the person who is entitled to benefit in some way from assets within a trust. 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.). 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. 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. Investment bonds should not be used to provide an income to a life tenant (e.g. The trust itself will also be subject to periodic and exit charges. What are FLITs. 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). This field is for validation purposes and should be left unchanged. This would not be a PET by Sally as she has no beneficial entitlement to the property in which the interest subsists and the trust fund does not leave the relevant property regime, so there is no exit charge. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. Tom has been the life tenant of the Tiptop family trust for more than 10 years. This is because the trust is subject to IHT in their estate. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. Assets held within an Interest in Possession Trust are treated for Inheritance Tax purposes as if they belong to the Life Tenant. For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. 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. Discretionary trust (DT): . The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. 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. she was given a life interest). The trust is not subject to the relevant property regime. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? Does it make any difference how many years after the first trust that the second trust is settled? This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. The relief can also be claimed if the gift is of business assets. Otherwise the trustees if the trust is UK resident. 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. A closer look at when a beneficiary has a life interest in the income of a trust fund. 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. 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. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. 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. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). 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. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. Gordon made a PET on 1 October 2008 subject to the 7 year rule. the life tenant of an IIP trust created in 1995. The settlor has the right to reclaim any tax they suffer from the trustees, and while they have this right it will be included in their estate for IHT. Trusts for vulnerable beneficiaries are explored here. 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 trustees will acquire assets at their market value at the date of death. Free trials are only available to individuals based in the UK. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. 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. The remainderman of the IIP trust is Peters' daughter. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. Although they are part of a team, they also, AffrayAffray is an offence created by the Public Order Act 1986 (POA 1986). 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). 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. Human Trafficking & Modern Slavery Statement. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. 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. The legislation for this is S624 ITTOIA 2005. Copyright 2023 Croner-i Taxwise-Protect. In the above example, Kirsteen and Lionel were married, but for the avoidance of doubt, an IPDI does not have to be in favour of a surviving spouse or civil partner. TSI (1) The transitional period to 5 October 2008 (S49C IHTA 1984), TSI (2) Surviving spouse or civil partner trusts (S49D IHTA 1984), TSI (3) Life insurance trusts (S49E IHTA 1984). In essence this is an administrative shortcut. 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. Assume the value of those shares increase through capital growth, post 2006. The settlor of a settlor interested IIP gets no relief for TMEs. This will both save the deceased's family time and help to avoid the estate tax. 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 spousal exemption will apply to these funds passing on Kirsteens death. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. When making investments, the trustees have responsibilities to both the life tenant and the beneficiaries entitled to capital, and must take account of the interests of both when choosing where to invest, unless the trust says otherwise. 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). Beneficiaries can use their personal allowance, savings rate band, personal savings allowance and dividend allowance where available against trust income. An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. 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. 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 . The IHT liability is split between Ginas free estate and the IIP trustees as follows. Victor creates an IIP trust where his three children are life tenants. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. She has a TSI. 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 trust will also set out who is entitled to the capital, and when. HMRC will effectively treat the addition as a new settlement. 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). 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). 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 the past, IIP trusts were subject to estate duty when the beneficiary died. Income received by the Trust should strictly be declared by the Trustees. 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). 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. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. 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. 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 ). If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. Registered number: 2632423. The beneficiary with the right to enjoy the trust property for the time being is said . Please share this article with your clients. a new-style life interest, i.e. This is a right to live in a property, sometimes for life, but more often for a shorter period. The trust fund is within the IHT estate of Harriet. The life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). 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. 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. 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 accept no responsibility for the content of these websites, nor do we guarantee their availability. SC Estates Unit 1 types of estates Estate: legal interest or right in the property Possession: ex: tenants have the right to possession Ownership Interest: right to claim on a property Fee: a form of ownership - means owner has a certain set of rights Title: evidence of ownership Freehold estate: interest in real property for an undetermined length of time Fee simple: ownership conveyed to . Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. Importantly, trustees cannot accumulate income. 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. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. 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). The life tenant only has an automatic entitlement to trust income and not capital. For example, it may allow them to live rent free in a residential property owned by the trust. You can learn more detailed information in our Privacy Policy. We may terminate this trial at any time or decide not to give a trial, for any reason. 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). No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. 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. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. These have the same IHT treatment as discretionary trusts. Often, trust income will be paid direct to the Life Tenant without passing through the hands of the Trustees. Note that Table 1 refers to an 'accumulation and maintenance trust'. Amanda Edwards TEP is a Solicitor with Boodle Hatfield. If so, it means that the beneficiary receives it and the trustees do not. 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. The trusts were not subject to the relevant property regime of periodic and exit charges. The technology to maintain this privacy management relies on cookie identifiers. In this case, the Life Tenant may declare income received direct by them on their own tax return and the Trustees would not include it on the Trust 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. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. These rules were abolished as they were no longer considered necessary. FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. Example of a post 5 October 2008 death of spouse giving rise to a TSI. 951415. 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. it is in the persons IHT estate. 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. This is a bit niche! The Will would then provide that the property passes to the children. . Also bear in mind that the rates below will apply to the trustees regardless of the level of income and therefore tax bands do not apply. * Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. 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. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. The Trustees do not qualify for a dividend allowance or savings allowance. 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. Top-slicing relief is available. Moor Place Lodge? Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. 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. Clearly therefore, it is not always necessary for the trust property to produce income. 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. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. Trusts set up on the death of a parent for their minor children (known as 'bereaved minors trusts' and '18 - 25 trusts') will also benefit from holdover relief when the beneficiary attains the relevant age. An interest in possession in trust property exists where . Click here for the customer website. 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. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. For the purposes of the residence nil-rate band, s8J IHTA 1984 states that property within an Immediate Post-Death Interest settlement (which is broadly an Interest in Possession Trust created via a Will see s49A IHTA 1984) is deemed to be part of the life tenants estate and so can be inherited by direct descendants this will generally be determined by the trust deed. All rights reserved. The most common example of enjoying property is the right to reside in a house. 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. Only the additional gift will be in the new regime and not the whole trust fund. 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. CONTINUE READING 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. 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. 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. The house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. Other beneficiaries do not. The beneficiary both receives the income and is entitled to it. If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. IIP trusts are quite common in wills. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. With regard to the existing life interest, the crucial factor is whether it is: 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 tenants inheritance tax estate and is a transfer of value (section 52). 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. It grants the life tenant ownership of property without having to include it in the will as part of their assets.