Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. In the past, IIP trusts were subject to estate duty when the beneficiary died. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. 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. What else? Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. 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. How is the income of an interest in possession trust taxed? 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. 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. 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. Moor Place Lodge? This provides that the rights under the insurance contract are treated as pre 22 March 2006 and if the premium payment is a transfer of value then it will be a PET. The value of the trust formed part of the estate of the IIP beneficiary. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. 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. The IHT is calculated as follows: . Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? on death or if they have reached a specific age set out in the trust deed etc. The relevant legislation is S49(1A) and S58(1) IHTA 1984. These TSIs apply to IIP trusts commencing before 22 March 2006. Life Interest Trusts are most commonly used to create and protect interests in a property. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. What are FLITs. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. 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). 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. Similarly, S629 ITTOIA 2005 applies to situations where the IIP beneficiary is a minor child or step child of the settlor (who is neither married nor in a civil partnership). You can learn more detailed information in our Privacy Policy. 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. Click here for a full list of Google Analytics cookies used on this site. IIP trusts are quite common in wills. 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 . Broadly speaking, a person has an interest in possession in property if he or she has the immediate right to receive any income arising from it or to the use or enjoyment of the property. as though they are discretionary trusts. This remains the case provided there is no change to the IIP beneficiary. 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. If these conditions are satisfied then it is classed as an immediate post death interest. The IHT liability is split between Ginas free estate and the IIP trustees as follows. However, trustees will not be able to deduct any expenses from mandated income. Top-slicing relief is available. Most trusts offered by product providers are not settlor interested. 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. We may terminate this trial at any time or decide not to give a trial, for any reason. The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. A tax efficient flexible arrangement was therefore obtained. Discretionary trust (DT): . Secrecy and confidentiality a personal view, Lifetime termination of an interest in possession, Professional Postgraduate Diploma in Private Wealth Advising, Russia-Ukraine conflict & associated sanctions, STEP Standard Provisions (England, Wales and Northern Ireland), STEP Employer Partnership Programme resources, Making a Complaint: Our Disciplinary Process, Brussels IV the camel train has finally arrived, Family business succession planning: east versus west, The Luxembourg Specialised Investment Fund, What to do when youve suffered an injury, Cross-border Judicial Cooperation in Offshore Litigation (the British Offshore World), a so-called qualifying interest in possession (within section 59), so that the life tenant is attributed with beneficial ownership of the property underlying the income interest; or. Prior to the IHT changes to trusts on 22 March 2006, it was common practice to use a form of IIP trust with life policies, including investment bonds. 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. If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. The most common example of enjoying property is the right to reside in a house. Kia also has experience of working in industry. 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 beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. A step child includes the child of a civil partner. Making a lifetime appointment from an IIP beneficiary to another beneficiary absolutely will be a PET by the outgoing beneficiary (or an exempt transfer if the interest passes to the spouse or civil partner) whether this is done before or after 6 October 2008. A 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. The beneficiary with the right to enjoy the trust property for the time being is said . 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. These are known as 'flexible' or 'power of appointment' trusts. 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). . The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. 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 . Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. International Sales(Includes Middle East), Death of the beneficiary with the qualifying interest in possession, Calculation of inheritance tax on death of life tenant, Ending of an interest in possession during beneficiary's lifetime, Circumstances when IHT not chargeable on termination of a QIIP, Circumstances when termination of a QIIP treated as a PET, Circumstances where termination of a QIIP immediately chargeable to IHT, Reservation of benefit in a QIIPapplication of the GWR rules, Calculation of IHT on lifetime termination of QIIP, Special rate of charge where termination is affected by a previous PET. For example, include: However, if income bypasses the trustees and the trust: then the settlor includes the income on his or her personal return. Note that Table 1 refers to an 'accumulation and maintenance trust'. 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). **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. 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. Therefore a more detailed review of your particular circumstances would be required before a definitive answer could be provided. Where the liability falls on the trustees, the trust rate applies. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. Prior to 22 March 2006 the value of trust assets was re-based for CGT purposes on the death of the beneficiary of an IIP trust. Victor creates an IIP trust where his three children are life tenants. Trust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax on the following occasions: on the death of the beneficiary with the interest in possession on the death of the beneficiary within seven years after a transfer or lifetime termination of his interest This website describes products and services provided by subsidiaries of abrdn group. For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. All rights reserved. Example of IHT arising on death of the income beneficiary. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. 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). 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. 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. 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. 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. 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. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. 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. Income tax anti-avoidance measures treat the trust income as that of the settlor if they and/or their spouse/civil partner can benefit from the 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. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. 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? 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. 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. If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. 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. Tom has been the life tenant of the Tiptop family trust for more than 10 years. Trustees Management Expenses (TMEs) are however different. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Most Life Interest Trusts are created by Will. 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. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. As such, the property doesn't go through the probate process. 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 type of IIP is known as an immediate post death interest or IPDI. 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 because the trust is subject to IHT in their estate. 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. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. Google Analytics cookies help us to understand your experience of the website and do not store any personal data. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. 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. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. Replacing the IIP beneficiary with an absolute interest. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. 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). Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. The term IIP is not defined in tax legislation. As a result, S46A IHTA 1984 was introduced. An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. 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. Moor Place? If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. In other words, there was a window between 22 March 2006 and 5 October 2008 when a beneficiary of an IIP trust could pass on that interest to others such as children. The trusts were not subject to the relevant property regime of periodic and exit charges. Remember that personal allowances are available to individuals only and not to trustees. The CGT death uplift is available on Harrys death and Wendys death. The spousal exemption will apply to these funds passing on Kirsteens death. 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. Consider Clara who created a pre 2006 IIP trust comprising shares for David. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. Lifetime gifts into IIP trusts are now chargeable lifetime transfers (CLTs) that are subject to IHT at 20% if they exceed the settlor's nil rate band. As on previous occasions Mary provided a totally professional, friendly and helpful service.. What is the CGT treatment of an interest in possession trust? 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. It is not to be treated as a substitute for getting full and specific advice from Wards. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. 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. The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. An OEIC generates income, albeit that with accumulation shares, income is not distributed but instead reinvested and added to capital. Full product and service provider details are described on the legal information. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. It grants the life tenant ownership of property without having to include it in the will as part of their assets. For UK financial advisers only, not approved for use by retail customers. 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). 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. Authorised and regulated by the Financial Conduct Authority. 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. Nevertheless, in its Capital Gains Manual HMRC state. 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. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. 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. She remains the current life tenant of the trust. Otherwise the trustees if the trust is UK resident. 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. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in trust. The maximum rate of IHT for these charges will be 6% but in practice is often zero if the value of the trust remains below the available nil rate band. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. Where the deceased's Will directs an NRB legacy to a pre-existing settlement (a pilot trust), would an appointment of this legacy to a surviving spouse within two years of the date of death qualify as an appointment of property settled by Will for the purposes of s 144 of IHTA 1984? Often, trust income will be paid direct to the Life Tenant without passing through the hands of the Trustees. on attaining a specified age or event). The trustees are only entitled to half the individual annual CGT exempt amount. 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). Free trials are only available to individuals based in the UK. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. See Practice Note: The meaning of relevant property for details. 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. 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. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. The life tenant has a life interest and remainderman is the capital . To qualify the interest cannot be under a bereaved minors trust or a trust for a disabled person and this must have been the case since the life tenant became entitled to the interest. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. 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. 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. 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 remainderman of the IIP trust is Peters' daughter. GET A QUOTE. When the beneficiary with the QIIP (the life tenant) dies, the trust property will be valued and counted as part of the deceased's estate, and the IHT estate charge will be levied on that property (in addition to any other property in the estate). Trust income paid directly to the beneficiary will be taxed at their rates. These are usually referred to as life interest trusts (or life rent in Scotland). 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. Each policy year, for a maximum of 20 years, 5% of the original investment (including any increments) in a bond can be withdrawn without triggering any immediate income tax liability. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs).