Qualifying interest in possession | Practical Law Right of Occupation a right to live in a property for a specified time, or for the beneficiarys lifetime, but usually subject to conditions. Certain expenses will be deductible when calculating profits (e.g. Moor Place? Consequently there was no CGT liability but the trustees were regarded as making a disposal of the trust assets at the then market value and the assets were deemed to have been acquired at their new base cost. Lifetime termination of an interest in possession | STEP Trustees will pay tax on income at the following rates: The life tenant (life renter in Scotland) is entitled to the net income after tax and expenses. The taxation of trust income and gains (Part 4) - the PFS In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. The trustees have the power to pay income and often capital to the life tenant. Prudential Distribution Limited is registered in Scotland. 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 website describes products and services provided by subsidiaries of abrdn group. 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. 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. 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). These may be subject to change in the future. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. 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. The trust fund is within the IHT estate of Jane. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. The remainderman of the IIP trust is Peters' daughter. Harry has been life tenant of a trust since 2005. Remember that personal allowances are available to individuals only and not to trustees. GET A QUOTE. Thats relevant property. The circumstances may not always be so straightforward. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? Many Trusts hold property that is known as 'relevant property'. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. * Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. Where the settlor has retained an interest in property in a settlement (i.e. The income, when distributed to them, retains its source nature, for example, dividend or interest. Copyright 2023 Croner-i Taxwise-Protect. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs). Privacy notice | Disclaimer | Terms of use. 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. This provides that the rights under the insurance contract are treated as pre 22 March 2006 and if the premium payment is a transfer of value then it will be a PET. Life Interest Trusts are most commonly used to create and protect interests in a property. Most Life Interest Trusts are created by Will. This will both save the deceased's family time and help to avoid the estate tax. 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. 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. 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. The trust fund is within the IHT estate of Harriet. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. The house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. This would not be a PET by Sally as she has no beneficial entitlement to the property in which the interest subsists and the trust fund does not leave the relevant property regime, so there is no exit charge. 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. On the other hand, there will be greater scope (and incentive) to create revocable life interests where trusts are within the relevant property regime. 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. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. She remains the current life tenant of the trust. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. We may terminate this trial at any time or decide not to give a trial, for any reason. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. 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. Setting the scene | Tax Adviser 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. 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. 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. She was widowed twice and was left the right to live in her 2nd husbands house on his death (i.e. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. 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. She remains the current life tenant of the trust. For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. SC Estates.docx - SC Estates Unit 1 types of estates As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. 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). The 100 annual limit is per parent and per child. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. 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. The spousal exemption will apply to these funds passing on Kirsteens death. 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. However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). It grants the life tenant ownership of property without having to include it in the will as part of their assets. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. S8H (2) IHTA 1984 defines a 'qualifying residential interest' as an interest in a dwelling-house which has been that person's residence at some time in their ownership. This remains the case provided there is no change to the IIP beneficiary. The beneficiary both receives the income and is entitled to it. 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. Beneficiaries can use their personal allowance, savings rate band, personal savings allowance and dividend allowance where available against trust income. A TSI can also arise with life insurance trusts. 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? For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. If these conditions are satisfied then it is classed as an immediate post death interest. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. See Practice Note: The meaning of relevant property for details. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. 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). Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. 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). Interest In Possession Trust in March 2023 - Help & Advice Beneficiary the person who is entitled to benefit in some way from assets within a trust. However, trustees will not be able to deduct any expenses from mandated income. The IHT liability is split between Ginas free estate and the IIP trustees as follows. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. Any investments owned by the trustees should be carefully managed to reduce this tax burden. Where a number of trusts have been created since 6 June 1978 by the same settlor, the trustees exemption is divided equally between them, subject to a minimum exemption of one fifth of the available amount. What is an Immediate Post Death Interest? The Will Bureau The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. Where the deceased's Will directs an NRB legacy to a pre-existing settlement (a pilot trust), would an appointment of this legacy to a surviving spouse within two years of the date of death qualify as an appointment of property settled by Will for the purposes of s 144 of IHTA 1984? Full product and service provider details are described on the legal information. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. This is a right to live in a property, sometimes for life, but more often for a shorter period. 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. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in trust. The relief can also be claimed if the gift is of business assets. 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. IIP trusts may be created during lifetime or on death. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. There are, of course, other ways in which an Immediate Post Death Interest can be used. Please share this article with your clients. These are known as 'flexible' or 'power of appointment' trusts. 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. For full details please see our information sheet on the taxation of Discretionary Trusts. 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? Flexible Life Interest Trusts and the Residential Nil Rate Band 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). There should not, for example, be a requirement for trustees to follow a mechanical rule for preserving the real value of the capital when the life tenant was the deceaseds widow who had fallen on hard times when the remainderman was young and well off. an interest in possession in an '18-25 trust' where the death of the person with the interest occurs before the beneficiary reaches 18 A person has an interest in possession if. As on previous occasions Mary provided a totally professional, friendly and helpful service.. Amanda Edwards TEP is a Solicitor with Boodle Hatfield. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. Inheritance tax on trusts - Trust the taxman | Accountancy Daily 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. 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. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Otherwise the trustees if the trust is UK resident. The content displayed here is subject to our disclaimer. The legislation for this is S624 ITTOIA 2005. The most common example of enjoying property is the right to reside in a house. This Fact Sheet has been prepared to provide you with basic information. Either a premium was paid on or after 22 March 2006 or an allowed variation is made to the contract on or after that day. It is not to be treated as a substitute for getting full and specific advice from Wards. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. 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. 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. This field is for validation purposes and should be left unchanged. Interest In Possession & Resident Nil-Rate Band. We accept no responsibility for the content of these websites, nor do we guarantee their availability. How is the income of an interest in possession trust taxed? Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. The IHT treatment of an IIP trust depends on whether it is created during lifetime or on death. As a result, S46A IHTA 1984 was introduced. Your choice regarding cookies on this site, Gifting the family home? For example, it may allow them to live rent free in a residential property owned by the trust. This is a bit niche! On Lionels death the trust fund will be inside his IHT estate. 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. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. 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. However, if there were any gains held over on creation of the trust (which could only apply if the assets were business assets) their death will bring the held over amount into charge. The 2006 legislation introduced the concept of a TSI. 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 ). Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. Interest in possession (IIP) is a trust law principle that has UK taxation implications. For tax purposes, the inter-spouse exemption applied on Ivans death. 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. CGT may be payable on the transfer of assets into or out of IIP trusts, but it may be possible to defer CGT in some circumstances. The trust is not subject to the relevant property regime. For all our latest news and advice sign up to our Enewsletter below. PDF RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK) - Association of Chartered If prior to 6 October 2008, the pre 22 March 2006 IIP came to an end while the income beneficiary was still alive to be replaced by a new beneficiary, then that new beneficiary will be taxed under the pre 22 March 2006 rules. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. Example of IHT arising on death of the income beneficiary. FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. S629 does not apply to a childs trust income in any tax year if, in that year, the total amount of income does not exceed 100. Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. Replacing the IIP beneficiary with an absolute interest. 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. 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. Instead, the value of the trust will form part of the life tenant's taxable estate on their death. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. This site is protected by reCAPTCHA. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? If the property is sold, the beneficiary will not be entitled to receive the income from the invested proceeds, so the trust is not a full Life Interest Trust. 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). They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. 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. Importantly, trustees cannot accumulate income. a new-style life interest, i.e. Two of three children are minors. . The technology to maintain this privacy management relies on cookie identifiers. CONTINUE READING 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. Income received by the Trust should strictly be declared by the Trustees. The Google Privacy Policy and Terms of Service apply. Assets transferred to trust on the settlor's death will not normally result in a CGT charge. This is still the position for IIP trusts which retain that IIP status. 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). 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. For example, where there is a life tenant entitled to income during their life and a second class (the remaindermen) entitled to capital on the death of the life tenant, then it would be unfair to the life tenant if the trustees were to invest in assets which produced little or no income, but offered the prospect of greater than usual capital growth. 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. Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. [4] For UK financial advisers only, not approved for use by retail customers. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only.