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. 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. If the settlor does not wish to reclaim the tax from the trustees this could be seen as a further gift. 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. Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? What else? Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. The magistrates court may decline jurisdiction where for example in cases involving a weapon/throwing objects, or conduct that causes serious, Qualifying interest in possession trustsIHT treatment, Art and heritage property, landed estates and farming families, Family businesses and ownership structures, Pensions, insurance and tax efficient investments, Tax avoidance, evasion and non-compliance, Taxation of trustsincome tax and capital gains tax, Draft Finance Bill 2016the residence nil rate band, High Courts rectification of deeds decision consistent with other recent decisions (A and others v D and others), No rewriting historythe flexibility of Jerseys remedies for mistake and inadequate deliberation (Representation of The Grundy Trust), Wealth Tax Commissiona wealth tax for the UK final report. They will typically use R185, Different rules apply where the income of the IIP beneficiary is treated as that of the settlor under the settlements legislation. Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. Trial includes one question to LexisAsk during the length of the trial. 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. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. as though they are discretionary trusts. Multiple trusts - same day additions, related settlements and Rysaffe planning. . on attaining a specified age or event). How is the income of an interest in possession trust taxed? Do I really need a solicitor for probate? Where the settlor has retained an interest in property in a settlement (i.e. 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. Top-slicing relief is not available for trustees. This type of IIP is known as an immediate post death interest or IPDI. FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. Clearly therefore, it is not always necessary for the trust property to produce income. 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. 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 CGT death uplift is available on Harrys death and Wendys death. Immediate Post Death Interest arises from an Interest In Possession (IIP) Trust created by a Will. 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). A disabled persons trust was set up after 8 April 2013, but the trust documentation refers to the pre-2013 rules requiring half of the trust capital applied during the disabled persons lifetime to be applied for their benefit. Registered number SC212640. Discretionary trust (DT): . An OEIC generates income, albeit that with accumulation shares, income is not distributed but instead reinvested and added to capital. 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. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. The circumstances may not always be so straightforward. Example 1 In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). 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 person with the IIP has an earlier interest. e.g. Trustees Management Expenses (TMEs) are however different. Does it make any difference how many years after the first trust that the second trust is settled? 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. If however the stocks and shares have been mixed, then an apportionment will be required. Interest In Possession & Resident Nil-Rate Band. 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. Immediate Post Death Interest. 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. The settlor will be taxed in the same way as an individual. 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 authorised and regulated by the Financial Conduct Authority. 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? IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. These may be subject to change in the future. 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. 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. 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. If these conditions are satisfied then it is classed as an immediate post death interest. 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). 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. The trustees will not have to supply all the income details onSA900and may even request to be taken out of the Self-Assessment regime for future years. 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). 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. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. 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). Instead, a revaluation will occur, the trustees or new owner will be treated as acquiring the assets at the uplifted market value and any gain held over on the creation of the . However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . Lionels life interest will qualify as an IPDI. 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 content displayed here is subject to our disclaimer. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. Life Interest Trusts are most commonly used to create and protect interests in a property. 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. Harry has been life tenant of a trust since 2005. 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). Example of a post 5 October 2008 death of spouse giving rise to a TSI. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. 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. Any investments owned by the trustees should be carefully managed to reduce this tax burden. 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. Therefore they are not taxed according to the relevant property regime, i.e. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. Kia also has experience of working in industry. This does not include the former spouse/civil partner and so trusts set up for a widow(er) will not be affected. But, if there is a clause in the trust deed giving the trustees power to pay capital to the life tenant then an insurance bond would therefore be a potential investment if the trustees so choose. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. An interest in possession in trust property exists where . This would be a chargeable lifetime transfer, and they should notify the trustees who may need to account for any IHT. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. Interest in possession (IIP) is a trust law principle that has UK taxation implications. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in trust. This means that on Peter's death, the assets of the trust will pass automatically to his daughter. For full details please see our information sheet on the taxation of Discretionary Trusts. 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. Otherwise the trustees if the trust is UK resident. she was given a life interest). 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. Note that Table 1 refers to an 'accumulation and maintenance trust'. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. Often, IPDI Trusts do not generate any income because the only trust asset is a house in which the Life Tenant lives. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. The relevant legislation is S49(1A) and S58(1) IHTA 1984. The relief can also be claimed if the gift is of business assets. Tax rates and reliefs may be altered. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. This is because the trust is subject to IHT in their estate. 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. This is still the position for IIP trusts which retain that IIP status. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. Certain expenses will be deductible when calculating profits (e.g. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees.