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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. Two of three children are minors. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. For example, include: However, if income bypasses the trustees and the trust: then the settlor includes the income on his or her personal return. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Investment bonds do not produce an income and there is no income tax charge unless money is withdrawn from the policy and a chargeable event occurs. 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. 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. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. This re-basing facility ceased for most IIP trusts created on or after 22 March 2006 and consequently, as from that date, the death of a beneficiary will not give rise to any CGT re-basing. 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. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. In essence this is an administrative shortcut. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). We do not accept service of court proceedings or other documents by email. 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. on death or if they have reached a specific age set out in the trust deed etc. Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. She has a TSI. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. Trustees Management Expenses (TMEs) are however different. All rights reserved. The income beneficiary has a life interest or life rent. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). The 100 annual limit is per parent and per child. She has a TSI. 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 . 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. Replacing the IIP beneficiary with an absolute interest. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. 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. The most common example of enjoying property is the right to reside in a house. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. Discretionary trust (DT): . Life Interest Trusts are most commonly used to create and protect interests in a property. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. 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. It is not normal for the life tenant to be one of those beneficiaries, but the trust may allow trustees to appoint capital to them. 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 trusts were not subject to the relevant property regime of periodic and exit charges. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. 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. The income tax treatment will depend on whether the trust income is mandated directly to the beneficiary(ies) or is paid to them via the trust. Beneficiaries receiving distributions from a trust are entitled to a tax credit for the rate tax paid (or effectively paid) by the trustees in respect of rental, savings income or dividend income. Any reference to legislation and tax is based on abrdns understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. A life interest trust (also known as "an interest in possession trust") is an arrangement recognised by English law under which someone is given the right to use an asset (usually a house) for the rest of their life without ever becoming the owner of the underlying capital. 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. 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. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. Change your settings. A step child includes the child of a civil partner. Assume that the trustees opted to give Sallys cousin a revocable life interest. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. The content displayed here is subject to our disclaimer. The spousal exemption will apply to these funds passing on Kirsteens death. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. Will a life policy that includes critical illness cover, that is settled into trust, be treated as a settlor interested trust due to the settlor potentially benefitting from the critical illness cover? Human Trafficking & Modern Slavery Statement. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. As on previous occasions Mary provided a totally professional, friendly and helpful service.. Taxation of the Assets held in the IPDI Trust. 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? To control which cookies are set, click Settings. 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. It would generally be simpler to make further gifts to a new trust. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. 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 should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. Only the additional gift will be in the new regime and not the whole trust fund. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. Immediate Post Death Interest in Possession Trust (IPDI) when an IIP begins immediately after the death of the person who has created the trust in their Will. This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. For completeness, note that a PET can arise on or after 22 March 2006, for lifetime gifts into a bereaved minor's trust on the coming to an end of an IPDI. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. This means that on Peter's death, the assets of the trust will pass automatically to his daughter. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. Tax rates and reliefs may be altered. Interest In Possession & Resident Nil-Rate Band. Evidence. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. HMRC will effectively treat the addition as a new settlement. Also, in cases where one beneficiary is entitled to income and others entitled to capital, then the trustees could diversify the trust fund, perhaps by investing in a mixture of OEICs to suit the income needs of one beneficiary, and insurance bonds to provide capital for the others. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. Therefore a more detailed review of your particular circumstances would be required before a definitive answer could be provided. "Prudential" is a trading name of Prudential Distribution Limited. 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 are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. 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). Where an individual becomes absolutely entitled to trust property during his or her Lifetime, the trustees will be treated as making a chargeable disposal for CGT. Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. Where the life interest in the trust begins immediately after the death of the person creating the trust then it is called an Immediate Post-Death Interest in possession trust (IPDI) by H M Revenue and Customs. It grants the life tenant ownership of property without having to include it in the will as part of their assets. For full details please see our information sheet on the taxation of Discretionary Trusts. Whilst the life tenant of a FLIT is alive, the property is . 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. 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. 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.). 2023 Croner-i is authorised and regulated by the Financial Conduct Authority in respect of Insurance Mediation Services, Financial Services Register no. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. Top-slicing relief is available. 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 is a bit niche! The term IIP is not defined in tax legislation. 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. 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 ). Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. Harry has been life tenant of a trust since 2005. We may terminate this trial at any time or decide not to give a trial, for any reason. 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. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. allowable letting expenses in a property business). The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime. The life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). If the trust is wound up after the death of the Life Tenant, then the assets distributed will be subject to an Inheritance Tax assessment and an exit charge may be payable if the value of the Trust exceeds the Nil Rate Band. For example, it may allow them to live rent free in a residential property owned by the 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. Where an individual wishes to settle part of their property on a life interest trust for themselves during their lifetime (which will be an immediately chargeable transfer and will not be a QIIP), how can they ensure they settle only the value of the available nil rate band of 325,000? 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. 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. 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 would be a chargeable lifetime transfer, and they should notify the trustees who may need to account for any IHT. This field is for validation purposes and should be left unchanged. This postpones the gain until the beneficiary ultimately disposes of the asset. There is an exception for disabled person's trusts. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. 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. Although they are part of a team, they also, AffrayAffray is an offence created by the Public Order Act 1986 (POA 1986). 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. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. The settlor of a settlor interested IIP gets no relief for TMEs. However, trustees will not be able to deduct any expenses from mandated income. To discuss trialling these LexisNexis services please email customer service via our online form. 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. The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. 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. 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). The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. 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. The trustees are only entitled to half the individual annual CGT exempt amount. Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. Kia also has experience of working in industry. 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 UK financial advisers only, not approved for use by retail customers. The trust fund is within the IHT estate of Jane. 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. While the life tenant is alive, the trust is treated as an interest in possession trust. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? 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. The trust is not subject to the relevant property regime. Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. An interest in possession in trust property exists where . Indeed, an IIP frequently exist in assets that do not produce income. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. The trust itself will also be subject to periodic and exit charges. This is a right to live in a property, sometimes for life, but more often for a shorter period. Amanda Edwards TEP is a Solicitor with Boodle Hatfield. Right of Occupation a right to live in a property for a specified time, or for the beneficiarys lifetime, but usually subject to conditions. 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. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. 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. 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. Registered number: 2632423. The relief can also be claimed if the gift is of business assets. 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. What else? by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. Trust income paid directly to the beneficiary will be taxed at their rates. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. Top-slicing relief is not available for trustees. If the value of the trust and the estate together exceed the Nil Rate Band tax will be due at 40% on any excess and this will be apportioned between the trust and the estate. S8H (2) IHTA 1984 defines a qualifying residential interest as an interest in a dwelling-house which has been that persons residence at some time in their ownership. Note that a Capital Redemption policy is not a life insurance policy. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. These are usually referred to as life interest trusts (or life rent in Scotland). However . 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. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. 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. Investment bonds should not be used to provide an income to a life tenant (e.g. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. These rules were abolished as they were no longer considered necessary. A closer look at when a beneficiary has a life interest in the income of a trust fund. 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. Example of IIP beneficiary being a minor child of the settlor. 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.