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. Trustees need to be mindful that investments should be suitable. The beneficiary both receives the income and is entitled to it. Assume Ginas free estate simply comprised cash in the bank of 90,000, Assume the house that Gina lived in under the IIP trust was valued at 2,500,000, Step 3 there will be a double NRB but no RNRB as the house is not passing to direct descendants. For tax purposes, the Life Tenant has an Interest in Possession. 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. 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. The Google Privacy Policy and Terms of Service apply. Interest in Possession Trust | ETC Tax | Expert Tax Advice IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. 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. As on previous occasions Mary provided a totally professional, friendly and helpful service.. For UK financial advisers only, not approved for use by retail customers. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. 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. 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. The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime. This website describes products and services provided by subsidiaries of abrdn group. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. Interest in possession trusts - abrdn . The settlor will be taxed in the same way as an individual. Residence nil rate band - abrdn On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. An interest in possession in trust property exists where . 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. It can be tried in either the magistrates court or the Crown Court. 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. Where the liability falls on the trustees, the trust rate applies. 2023 Croner-i is authorised and regulated by the Financial Conduct Authority in respect of Insurance Mediation Services, Financial Services Register no. . The value of the trust formed part of the estate of the IIP beneficiary. 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. 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. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in 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. She has a TSI. 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. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? on attaining a specified age or event). To discuss trialling these LexisNexis services please email customer service via our online form. 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). All rights reserved. There are no capital gains tax consequences for lifetime gifts involving cash or existing bonds. It is then up to the Trustees to decide which beneficiaries receive trust assets, and when this happens. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. The trustees may be able to jointly elect with the relevant beneficiary for gains to be held over if the asset is either a 'qualifying business asset' or the trust 'qualifies' (mainly lifetime IIP trusts created after 21 March 2006). For example, it may allow them to live rent free in a residential property owned by the trust. Life Interest in Possession Trusts - Marlow Wills Where a beneficiary has a life interest in the income of a trust fund, any inheritance tax consequences of a lifetime termination of that interest will depend (ignoring any possible reliefs) both on the nature of the life interest being terminated and on the nature of the new interest being created. This will both save the deceased's family time and help to avoid the estate tax. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. Interest in possession (IIP) is a trust law principle that has UK taxation implications. Trustees Management Expenses (TMEs) are however different. Lionels life interest will qualify as an IPDI. 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. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. 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. Gordon made a PET on 1 October 2008 subject to the 7 year rule. Top-slicing relief is available. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. We do not accept service of court proceedings or other documents by email. Third-Party cookies are set by our partners and help us to improve your experience of the website. 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. Indeed, an IIP frequently exist in assets that do not produce income. Beneficiary the person who is entitled to benefit in some way from assets within a trust. CONTINUE READING On trust for such of my wife, children and remoter issue as the trustees shall from time to time by deed or deeds revocable or irrevocable at their absolute discretion appoint and in default of any appointment for my children Edward and Fiona in equal shares absolutely. Top-slicing relief is not available for trustees. 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. If the Life Tenants interest is brought to an end during their lifetime but the trust assets remain held on discretionary trusts, the Life Tenant will be deemed to have made an immediately chargeable transfer for Inheritance Tax and the trust will pay tax at a rate of 20% on the value of trust assets exceeding the Nil Rate Band (currently 325,000 in 2021-22). Basic rate taxpayers will have to pay basic rate on mandated income but otherwise the tax paid by the trustees will satisfy their liability. 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. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. she was given a life interest). Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. Existing user? This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. Life Interests and Rights of Occupation - Wards Solicitors The settlor has the right to reclaim any tax they suffer from the trustees, and while they have this right it will be included in their estate for IHT. 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. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. 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. On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. 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. IIP trusts will need to be entered on the HMRC trust register if they have income that is not mandated directly to the life tenant, or capital gains from disposals. Many Trusts hold property that is known as 'relevant property'. 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. Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. In other words, there was a window between 22 March 2006 and 5 October 2008 when a beneficiary of an IIP trust could pass on that interest to others such as children. The 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. Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. The circumstances may not always be so straightforward. The Trustees do not qualify for a dividend allowance or savings allowance. Victor creates an IIP trust where his three children are life tenants. If so, it means that the beneficiary receives it and the trustees do not. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. 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. 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. Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? The CGT death uplift is available on Harrys death and Wendys death. Lifetime termination of an interest in possession | STEP 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). This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy.
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