Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. Qualifying interest in possession trustsIHT treatment Full product and service provider details are described on the legal information. 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). Copyright 2023 Croner-i Taxwise-Protect. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. Life Interests and Rights of Occupation - Wards Solicitors Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. * Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. Other beneficiaries do not. Please share this article with your clients. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. For tax purposes, the inter-spouse exemption applied on Ivans death. Prudential Distribution Limited is registered in Scotland. Existing user? Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. Income received by the Trust should strictly be declared by the Trustees. 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. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. 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). Assuming no mandating procedure has been carried out then the trustees should make a Trust and Estate Tax Return, Again, assuming no mandating procedure is in place, the IIP beneficiary should receive a statement from the trustees of trust income. The income, when distributed to them, retains its source nature, for example, dividend or interest. The beneficiary should use SA107 Trusts etc. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. Click here for a full list of third-party plugins used on this site. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. 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. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. CONTINUE READING a new-style life interest, i.e. Any investments owned by the trustees should be carefully managed to reduce this tax burden. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. 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). Sign-in 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 settlor of a settlor interested IIP gets no relief for TMEs. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. 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 ). Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. We accept no responsibility for the content of these websites, nor do we guarantee their availability. Secrecy and confidentiality a personal view, Lifetime termination of an interest in possession, Professional Postgraduate Diploma in Private Wealth Advising, Russia-Ukraine conflict & associated sanctions, STEP Standard Provisions (England, Wales and Northern Ireland), STEP Employer Partnership Programme resources, Making a Complaint: Our Disciplinary Process, Brussels IV the camel train has finally arrived, Family business succession planning: east versus west, The Luxembourg Specialised Investment Fund, What to do when youve suffered an injury, Cross-border Judicial Cooperation in Offshore Litigation (the British Offshore World), a so-called qualifying interest in possession (within section 59), so that the life tenant is attributed with beneficial ownership of the property underlying the income interest; or. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. What if the facts had been similar but instead of two properties, the trust contained a number of stocks and shares to which more had been added. It will not become subject to the relevant property regime. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). Flexible Life Interest Trust A Life Interest Trust where the trustees are given powers to advance capital from the trust to beneficiaries, including the Life Tenant, during their lifetime. Therefore they are not taxed according to the relevant property regime, i.e. The life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). Life Interest in Possession Trusts - Marlow Wills Amanda Edwards TEP is a Solicitor with Boodle Hatfield. Free trials are only available to individuals based in the UK. Where the settlor has retained an interest in property in a settlement (i.e. allowable letting expenses in a property business). Indeed, an IIP frequently exist in assets that do not produce income. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. A step child includes the child of a civil partner. Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority. Interest In Possession & Resident Nil-Rate Band. She has a TSI. Top-slicing relief is not available for trustees. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. 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. Any further gifts made to an interest in possession trust that was in force prior to 22 March 2006 will be treated as relevant property. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. Two of three children are minors. This is a bit niche! For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. 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. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. The 100 annual limit is per parent and per child. These may be subject to change in the future. Basic rate taxpayers will have to pay basic rate on mandated income but otherwise the tax paid by the trustees will satisfy their liability. Bonds may be used, however, as part of an overall investment strategy to maintain capital for the remaindermen, using other investments to provide income for the life tenant. 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. 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. 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. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. Gina has recently passed away. 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. e.g. 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. Interest in possession trusts - abrdn 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. Note that a Capital Redemption policy is not a life insurance policy. This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. Where an IPDI trust has been set up and the surviving spouse or civil partner has the interest in possession, the RNRB of the deceased spouse can be transferred and will be available to the estate of the life tenant as long as the property is then left to the life tenant's direct descendants. The technology to maintain this privacy management relies on cookie identifiers. 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. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. These are usually referred to as life interest trusts (or life rent in Scotland). PDF CHAPTER 12 INTEREST IN POSSESSION TRUSTS - IHT ISSUES - LexisNexis The trust itself will also be subject to periodic and exit charges. However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. Authorised and regulated by the Financial Conduct Authority. If however the stocks and shares have been mixed, then an apportionment will be required. Understanding interest in possession trusts. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. 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. A tax efficient flexible arrangement was therefore obtained. 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. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. Qualifying interest in possession trusts IHT treatment Investment bonds should not be used to provide an income to a life tenant (e.g. For example, it may allow them to live rent free in a residential property owned by the trust. 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? 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. 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. On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. What Is a Life Estate? - Investopedia Registered number: 2632423. As such, the property doesn't go through the probate process. Where the beneficiary has received income from the trustees net of tax, then to arrive at the correct measure of income, the net income is grossed up since the beneficiary is entitled to, and taxable on, the gross amount. Trustees must hold the balance fairly between different categories of beneficiary. Discretionary trust (DT): . 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? If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. The spousal exemption will apply to these funds passing on Kirsteens death. 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. Each policy year, for a maximum of 20 years, 5% of the original investment (including any increments) in a bond can be withdrawn without triggering any immediate income tax liability. Nevertheless, in its Capital Gains Manual HMRC state. 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. 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. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. 22 March 2006 is a key date regarding the taxation of IIP Trusts. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. 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. 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. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. Thats relevant property. Privacy notice | Disclaimer | Terms of use. However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). 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). 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. 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. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. Only the additional gift will be in the new regime and not the whole trust fund.