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). 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. Interest in possession (IIP) is a trust law principle that has UK taxation implications. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). The trusts were not subject to the relevant property regime of periodic and exit charges. 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. If however the stocks and shares have been mixed, then an apportionment will be required. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. On the Life Tenants death any assets owned by the trust at that point are revalued for Capital Gains Tax so that there is no gain or loss to the trustees. An IIP trust can be created on death either by the terms of the deceased's Will, the laws of intestacy or a deed of variation. 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. In essence this is an administrative shortcut. 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 is because the trust is subject to IHT in their estate. 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. the life tenant of an IIP trust created in 1995. 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). Investment bonds should not be used to provide an income to a life tenant (e.g. Click here for a full list of third-party plugins used on this site. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. 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. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. There is an exception for disabled person's trusts. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. The trustees have the power to pay income and often capital to the life tenant. Harry has been life tenant of a trust since 2005. 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. This postpones the gain until the beneficiary ultimately disposes of the asset. 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. 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. This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). e.g. There would have been no spousal exemption if the transfer on 1 March 2009 had been made while Ivan was still alive (because the relevant property regime rules would have applied). 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. 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. All rights reserved. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. Remember that personal allowances are available to individuals only and not to trustees. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. A tax efficient flexible arrangement was therefore obtained. 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. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. Example 1 Amanda Edwards TEP is a Solicitor with Boodle Hatfield. Beneficiary the person who is entitled to benefit in some way from assets within a trust. The assets of the trust were . However the tax treatment of the trust is very similar to that of a full Life Interest Trust. 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? In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. An interest in possession in trust property exists where . What else? 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). Certain expenses will be deductible when calculating profits (e.g. 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). In 2017 HMRC set up the Trust Registration Service. 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. 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). As on previous occasions Mary provided a totally professional, friendly and helpful service.. The trust fund is within the IHT estate of Jane. 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. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. a trust), the income arising is treated as the settlors income for all tax purposes. Replacing the IIP beneficiary with an absolute interest. This website describes products and services provided by subsidiaries of abrdn group. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. Other beneficiaries do not. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. 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. 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. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Right of Occupation a right to live in a property for a specified time, or for the beneficiarys lifetime, but usually subject to 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. 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). Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. Trial includes one question to LexisAsk during the length of the trial. For example, include: However, if income bypasses the trustees and the trust: then the settlor includes the income on his or her personal return. The outgoing beneficiary should also be removed as a potential future beneficiary to avoid the transaction being regarded as a gift with reservation of benefit and still regarded as being in their estate. The income beneficiary has a life interest or life rent. Gordon has had a life interest (the prior interest) under an IIP trust since 1 July 2000. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. 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. Although they are part of a team, they also, AffrayAffray is an offence created by the Public Order Act 1986 (POA 1986). Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. These may be subject to change in the future. Prior to 22 March 2006 the value of trust assets was re-based for CGT purposes on the death of the beneficiary of an IIP trust. The settlor will be taxed in the same way as an individual. You will not appear to benefit from the residence nil-rate band (RNRB) as the interest is not going to direct descendants, but initially into trust for your spouse. 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. 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. 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. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. The trustees are only entitled to half the individual annual CGT exempt amount. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. on the death of a life tenant of an 'old' interest in possession trust the trust property must be included in the deceased life tenant's death estate. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. 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 value of the trust formed part of the estate of the IIP beneficiary. For the purposes of the residence nil-rate band, s8J IHTA 1984 states that property within an Immediate Post-Death Interest settlement (which is broadly an Interest in Possession Trust created via a Will see s49A IHTA 1984) is deemed to be part of the life tenants estate and so can be inherited by direct descendants this will generally be determined by the trust deed. a new-style life interest, i.e. 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 ). 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). On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. 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. 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. 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. However . This will also be an immediately chargeable transfer and Janes income interest will be in the relevant property regime (contrast this with the termination of Toms interest in favour of Jane on death, which would be spouse exempt, with Jane taking a TSI). 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. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. For tax purposes, the inter-spouse exemption applied on Ivans death. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. **Trials are provided to all LexisNexis content, excluding Practice Compliance, Practice Management and Risk and Compliance, subscription packages are tailored to your specific needs. Prudential Distribution Limited is registered in Scotland. It is not to be treated as a substitute for getting full and specific advice from Wards. A TSI can also arise with life insurance trusts. Do I really need a solicitor for probate? Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. 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. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. Indeed, an IIP frequently exist in assets that do not produce income. 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). See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. The CGT death uplift is available on Harrys death and Wendys death. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. It can be tried in either the magistrates court or the Crown Court. Discretionary trust (DT): . This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland).
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