Access this content for free with a trial of LexisNexis and benefit from: To view the latest version of this document and thousands of others like it, sign-in with LexisNexis or register for a free trial. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. The income beneficiary has a life interest or life rent. 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. The trust will also set out who is entitled to the capital, and when. 22 March 2006 is a key date regarding the taxation of IIP Trusts. As on previous occasions Mary provided a totally professional, friendly and helpful service.. Assets held within an Interest in Possession Trust are treated for Inheritance Tax purposes as if they belong to the Life Tenant. Please choose an optionGoogle SearchBing SearchGoogle AdvertLaw Society WebsitePersonal/Friend RecommendationProfessional RecommendationSocial MediaThomson LocalYellow Pages/Yell.comOther, Please choose an optionBristolKeynshamBradley StokeHenleazeWorleThornburyYateClevedonPortisheadStaple HillNailseaWeston-super-MareN/A. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. These are known as 'flexible' or 'power of appointment' trusts. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). The settlor will be taxed in the same way as an individual. Therefore they are not taxed according to the relevant property regime, i.e. 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. The beneficiary both receives the income and is entitled to it. FLITs are essentially a life interest for a person (usually the surviving spouse), with an underlying discretionary trust that will arise when the surviving spouse dies. These are usually referred to as life interest trusts (or life rent in Scotland). Other beneficiaries do not. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. As such, the property doesn't go through the probate process. 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. Example of IHT arising on death of the income beneficiary. 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. This can make the tax position complex and is normally best avoided. 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). Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. 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. 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. 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. Replacing the IIP beneficiary with a new IIP beneficiary on or after 6 October 2008 will be a chargeable lifetime transfer (and may therefore incur a lifetime charge of 20% depending on the value) from the beneficiary that has been replaced. 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. 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. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. What else? Assume the value of those shares increase through capital growth, post 2006. 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. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. This website describes products and services provided by subsidiaries of abrdn group. A tax efficient flexible arrangement was therefore obtained. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. On Lionels death the trust fund will be inside his IHT estate. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. A step child includes the child of a civil partner. For example, include: However, if income bypasses the trustees and the trust: then the settlor includes the income on his or her personal return. 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). As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. Multiple trusts - same day additions, related settlements and Rysaffe planning. Evidence. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. 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. 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. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. Tom has been the life tenant of the Tiptop family trust for more than 10 years. That income will retain its nature meaning that the tax due by the beneficiary will reflect the dividend nil rate allowance, the starting rate for savings income and the personal savings allowance as appropriate. Your choice regarding cookies on this site, Gifting the family home? It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. 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. Human Trafficking & Modern Slavery Statement. * Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. We may terminate this trial at any time or decide not to give a trial, for any reason. The term IIP is not defined in tax legislation. This is a right to live in a property, sometimes for life, but more often for a shorter period. How is the income of an interest in possession trust taxed? IIP trusts may be created during lifetime or on death. The assets of the trust were . It is a register of the beneficial ownership of trusts. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. If so, it means that the beneficiary receives it and the trustees do not. The Will would then provide that the property passes to the children. 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. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. Certain expenses will be deductible when calculating profits (e.g. The 100 annual limit is per parent and per child. Or this could be carried out in favour of Sallys cousin absolutely, which gives rise to an exit charge assessable on the trustees, as the assets in the trust fund are leaving the settlement (assuming no available reliefs). However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Nevertheless, in its Capital Gains Manual HMRC state. Right of Occupation a right to live in a property for a specified time, or for the beneficiarys lifetime, but usually subject to conditions. The content displayed here is subject to our disclaimer. What are FLITs. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. This Fact Sheet has been prepared to provide you with basic information. 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. If trust income passes directly or indirectly (for example, through an investment manager) to a beneficiary without going via the trustees the beneficiary needs to ensure that it is returned correctly on his/her tax return. 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. 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. For UK financial advisers only, not approved for use by retail customers. The new beneficiary will have a TSI. Most trusts offered by product providers are not settlor interested. on the death of a life tenant of an 'old' interest in possession trust the trust property must be included in the deceased life tenant's death estate. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. Third-Party cookies are set by our partners and help us to improve your experience of the website. The trust fund is within the IHT estate of Jane. Immediate Post Death Interest. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. 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. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. 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. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. "Prudential" is a trading name of Prudential Distribution Limited. For example, it may allow them to live rent free in a residential property owned by the trust. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. 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. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. Under current rules, the maximum tax rate applicable to the exit charge would be 6% of the value of any assets exceeding the Nil Rate Band. 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. Change your settings. 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 ). This allows the trustees to invest in life policies, such as investment bonds. Since 6 October 2008, changing a beneficiary of one of these trusts will normally bring it into the relevant property regime and taxed in the same way as a discretionary trust. 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. Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. To discuss trialling these LexisNexis services please email customer service via our online form. Any investments owned by the trustees should be carefully managed to reduce this tax burden. Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. 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. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. Prudential Distribution Limited is registered in Scotland. Registered number SC212640. 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. 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. The trust fund is within the IHT estate of Harriet. This does not include the former spouse/civil partner and so trusts set up for a widow(er) will not be affected. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. 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. 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? Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Trustees must hold the balance fairly between different categories of beneficiary. Two of three children are minors. 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. The most common example of enjoying property is the right to reside in a house. What is the CGT treatment of an interest in possession trust? The relevant legislation is S49(1A) and S58(1) IHTA 1984. Existing user? 951415. e.g. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. 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. 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. This could be in favour of Sallys cousin, who will have a revocable life interest. 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. Trusts for vulnerable beneficiaries are explored here. There are special rules for life policy trusts set out later. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? 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. 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. . 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. 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. Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? The trusts were not subject to the relevant property regime of periodic and exit charges. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. 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). 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. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. 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). 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. Trial includes one question to LexisAsk during the length of the trial. A closer look at when a beneficiary has a life interest in the income of a trust fund. Remember that personal allowances are available to individuals only and not to trustees. 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. 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. Moor Place? FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. Indeed, an IIP frequently exist in assets that do not produce income. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. allowable letting expenses in a property business). Often, IPDI Trusts do not generate any income because the only trust asset is a house in which the Life Tenant lives. The annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. 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. The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. 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. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges.