Removing or resetting your browser cookies will reset these preferences. 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. The calculation of Ginas estate will include the value of the capital underlying the IIP. 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. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. 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. 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. 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. 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. She remains the current life tenant of the trust. a new-style life interest, i.e. 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. GET A QUOTE. A closer look at when a beneficiary has a life interest in the income of a trust fund. In contrast bonds are non-income producing investments and withdrawals are a return of capital not income. 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. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). 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 . 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. 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. Therefore a more detailed review of your particular circumstances would be required before a definitive answer could be provided. Remember that personal allowances are available to individuals only and not to trustees. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. Gordon made a PET on 1 October 2008 subject to the 7 year rule. Example of a post 5 October 2008 death of spouse giving rise to a TSI. 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). 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. 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). Essentially an IPDI is created when an individual becomes beneficially entitled to an IIP on or after 22 March 2006 under a will or intestacy where the bereaved minors provisions do not apply and neither do the disabled persons interest rules. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. These are known as 'flexible' or 'power of appointment' trusts. 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. Privacy notice | Disclaimer | Terms of use. a trust), the income arising is treated as the settlors income for all tax purposes. Moor Place Lodge? This is still the position for IIP trusts which retain that IIP status. However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. Beneficiary the person who is entitled to benefit in some way from assets within a trust. 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). The most common example of enjoying property is the right to reside in a house. It is a register of the beneficial ownership of trusts. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Often, IPDI Trusts do not generate any income because the only trust asset is a house in which the Life Tenant lives. 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)? These may be subject to change in the future. Note that a Capital Redemption policy is not a life insurance policy. 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. Indeed, an IIP frequently exist in assets that do not produce income. It is then up to the Trustees to decide which beneficiaries receive trust assets, and when this happens. This is because there needs to be a disposal of property to create a settlement (S43(2) IHTA 1984) and an addition of value doesnt result from a disposal of property. Gifts into these trusts were potentially exempt transfers (PETs) rather than CLTs. This field is for validation purposes and should be left unchanged. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. We use cookies to optimise site functionality and give you the best possible experience. Existing user? If however the income beneficiarys interest comes to an end on or after 22 March 2006 and the property remains in trust, then the outgoing beneficiary is treated as making a Chargeable Lifetime Transfer (CLT) based on the trust fund value at that time, and the trust will become subject to the relevant property regime. 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. 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. Human Trafficking & Modern Slavery Statement. 22 March 2006 was the day of the 2006 Budget which made far reaching changes to the IHT treatment of trusts, many of which took immediate effect. This postpones the gain until the beneficiary ultimately disposes of the asset. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. 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. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. 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. Interest In Possession & Resident Nil-Rate Band. 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. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). The person with the IIP has an earlier interest. However the tax treatment of the trust is very similar to that of a full Life Interest 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. 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). Life Tenant the beneficiary entitled to receive lifetime benefits from a Trust. Basic rate taxpayers will have to pay basic rate on mandated income but otherwise the tax paid by the trustees will satisfy their liability. An OEIC generates income, albeit that with accumulation shares, income is not distributed but instead reinvested and added to capital. For example, it may allow them to live rent free in a residential property owned by the trust. They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. 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). Therefore they are not taxed according to the relevant property regime, i.e. Any investments owned by the trustees should be carefully managed to reduce this tax burden. 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. He dies in 2020 and his wife Wendy then takes an IIP her interest will be a TSI and because her estate is increased, spouse exemption is available. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. 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). This could be in favour of Sallys cousin, who will have a revocable life interest. Harry has been life tenant of a trust since 2005. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. The technology to maintain this privacy management relies on cookie identifiers. 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. FA 2006 changed the definition of a qualifying IIP so that it now excludes any settlement created on or after 22 March 2006, other than an IPDI, disabled persons interest, or TSI. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. 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. Bonds may be used, however, as part of an overall investment strategy to maintain capital for the remaindermen, using other investments to provide income for the life tenant. In her will she includes a provision stating that her estate will pass to trustees where Lionel will have a life interest (entitled to income) and on his death the capital will pass absolutely to her three children. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. In valuing the trust property the related property rules will apply. 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. We may terminate this trial at any time or decide not to give a trial, for any reason. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? Full product and service provider details are described on the legal information. The relevant legislation is S49(1A) and S58(1) IHTA 1984. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. Tom has been the life tenant of the Tiptop family trust for more than 10 years. 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. Interest in possession (IIP) is a trust law principle that has UK taxation implications. Indeed, an IIP frequently exist in assets that do not produce income. 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. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. 22 March 2006 is a key date regarding the taxation of IIP Trusts. The trustees will acquire assets at their market value at the date of death. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. 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. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. Gordon has had a life interest (the prior interest) under an IIP trust since 1 July 2000. The legislation for this is S624 ITTOIA 2005. If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. Sometimes there are instructions or arrangements for income to bypass the trustees of an IIP trust. 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. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. The trustees are a separate entity for Capital Gains Tax purposes and are liable to pay tax on any gains they make over and above the trusts annual allowance. To discuss trialling these LexisNexis services please email customer service via our online form. 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. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. You can learn more detailed information in our Privacy Policy. The value of the trust formed part of the estate of the IIP beneficiary. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). Change your settings. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. The beneficiary should use SA107 Trusts etc. Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority. The circumstances may not always be so straightforward. For tax purposes, the inter-spouse exemption applied on Ivans death. 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. e.g. 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. As outlined below, it is possible for trustees to mandate trust income to a beneficiary. 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. 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. Note that Table 1 refers to an 'accumulation and maintenance trust'. She is AAT and ATT qualified and is currently studying ACCA. Please share this article with your clients. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. 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). The income beneficiary has a life interest or life rent. 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. 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. 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. The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. 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 trust itself will also be subject to periodic and exit charges. How is the income of an interest in possession trust taxed? In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. A life estate is often created as a part of the estate planning process in the United States. Top-slicing relief is not available for trustees. The value of tax reliefs to the investor depends on their financial circumstances. Information as to whether trustees can buy a bond and who is assessed for the tax on a chargeable event gain on a bond in trust is contained in our important information about trusts document. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. Any transfer of an asset out of the trust may give rise to a liability if there has been a substantial gain prior to distribution. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. The trustees have the power to pay income and often capital to the life tenant. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. 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). Multiple trusts - same day additions, related settlements and Rysaffe planning. 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. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. It would generally be simpler to make further gifts to a new trust. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. Click here for the customer website. For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. It grants the life tenant ownership of property without having to include it in the will as part of their assets. 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). 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. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. 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. The life tenant's interest may entitle them to income generated by trust assets, or it may allow them the use of the assets (for example, if a house is contained in the trust they might be granted the right to live in that house). Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. 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. 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. 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. This will bring the trust into the relevant property regime. Clearly therefore, it is not always necessary for the trust property to produce income. 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. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. as though they are discretionary trusts. The CGT death uplift is available on Harrys death and Wendys death. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. Example 1 Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. Example of IHT arising on death of the income beneficiary. 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. For full details please see our information sheet on the taxation of Discretionary 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. Free trials are only available to individuals based in the UK. She has a TSI. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. The IHT treatment of an IIP trust depends on whether it is created during lifetime or on death. IIP trusts are quite common in wills. 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). Investment bonds should not be used to provide an income to a life tenant (e.g.
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