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. Tom has been the life tenant of the Tiptop family trust for more than 10 years. 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? This regime is explored here. Thats relevant property. 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. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. Replacing the IIP beneficiary with an absolute interest. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. 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. The relief can also be claimed if the gift is of business assets. Therefore, if the IIP terminates or the beneficiary disposes of his/her IIP then a PET arises if the property passes to another individual absolutely. These beneficiaries are referred to as the remaindermen. 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). The person with the IIP has an earlier interest. This is a bit niche! This will be a potentially exempt transfer (PET) by Tom in favour of a life interest for Pete, which will be an immediately chargeable transfer by Tom. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. The calculation of Ginas estate will include the value of the capital underlying the IIP. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. PDF CHAPTER 12 INTEREST IN POSSESSION TRUSTS - IHT ISSUES - LexisNexis 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. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. 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. 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 trust has not qualified as a trust for bereaved minors or a disabled person's interest since the IIP began. 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. The husbands Will would create a Life Interest Trust or Right of Occupation for his wife, so that she can live in the property for as long as she needs. The IHT liability is split between Ginas free estate and the IIP trustees as follows. What Is a Life Estate? - Investopedia 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. In the past, IIP trusts were subject to estate duty when the beneficiary died. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. 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. Life Interest Trust where a beneficiary is given an interest in trust assets for their lifetime, usually the entitlement to receive income, and/or live in a property owned by the trust. If so, it means that the beneficiary receives it and the trustees do not. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs). There are 3 sets of circumstances when this may arise as covered in the next 3 sections. The beneficiary should use SA107 Trusts etc. Income received by the Trust should strictly be declared by the Trustees. Multiple trusts - same day additions, related settlements and Rysaffe planning. Prior to 22 March 2006, insurance companies commonly offered flexible or power of appointment IIP trusts where the trustees have a power to appoint amongst, or to vary, beneficiaries. Remember that personal allowances are available to individuals only and not to trustees. On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). 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. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. 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. 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. 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. She remains the current life tenant of the trust. 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 house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. The annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). What is the CGT treatment of an interest in possession trust? Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. The remainderman of the IIP trust is Peters' daughter. 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. 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. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. There are, of course, other ways in which an Immediate Post Death Interest can be used. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. Trust income paid directly to the beneficiary will be taxed at their rates. v. t. e. An interest in possession trust is a trust in which at least one beneficiary has the right to receive the income generated by the trust (if trust funds are invested) or the right to enjoy the trust assets for the present time in another way. 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. Does a life interest will trust need to be registered with HMRC? Trustees need to be mindful that investments should be suitable. At least one beneficiary will be entitled to all the trust income. During the lifetime of the Life Tenant, the Trust is not subject to 10 yearly charges or charges when an asset leaves the trust, unlike the tax treatment of Discretionary Trusts. This can make the tax position complex and is normally best avoided. 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. 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. A closer look at when a beneficiary has a life interest in the income of a trust fund. The assets of the trust were . 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. 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. 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. Examples of this are where the IIP beneficiary is a spouse, civil partner or minor child of the settlor. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. Often, trust income will be paid direct to the Life Tenant without passing through the hands of the Trustees. 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. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). Certain expenses will be deductible when calculating profits (e.g. 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. 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. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. This is because the trust is subject to IHT in their estate. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. Discretionary trust (DT): . Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. Wards Solicitors is a trading name of Wards Solicitors LLP which is a limited liability partnership registered in England and Wales (registered number OC417965) and authorised and regulated by the Solicitors Regulation Authority under number 646117. This remains the case provided there is no change to the IIP beneficiary. Immediate Post Death Interest arises from an Interest In Possession (IIP) Trust created by a Will. Example of IHT arising on death of the income beneficiary. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. Setting the scene | Tax Adviser 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. 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. What else? Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? 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. This can be beneficial particularly where the intended life tenants marginal rate of tax is 40 per cent or lower, in contrast to the increased 50 per cent rate for trustees of discretionary trusts, which will apply after 6 April 2010. 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. 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. The IHT is calculated as follows: . An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. 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.
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