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. On Lionels death the trust fund will be inside his IHT estate. 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). Click here for the customer website. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. If the Life Tenant dies within 7 years of the termination of the trust, the PET will be aggregated with their own estate for calculation of Inheritance Tax. 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. If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. 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. Two of three children are minors. Click here for a full list of third-party plugins used on this site. 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). There are special rules for life policy trusts set out later. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. All rights reserved. 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. 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. If an individual transfers property into a trust, that is a disposal by the settlor at market value even if the settlor retains an interest. The beneficiary both receives the income and is entitled to it. 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. 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. A step child includes the child of a civil partner. It would generally be simpler to make further gifts to a new trust. 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. Trustees must hold the balance fairly between different categories of beneficiary. The value of tax reliefs to the investor depends on their financial circumstances. The IHT liability is split between Ginas free estate and the IIP trustees as follows. This can make the tax position complex and is normally best avoided. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. Evidence. Authorised and regulated by the Financial Conduct Authority. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. Signatureless process for onshore bonds content, Heritage servicing and new business tracking, Interest in Possession (IIP) Trusts Taxation, What you need to know about Interest in Possession trusts, Lifetime gifts into IIP trusts prior to 22 March 2006, TSI (1) The transitional period to 5 October 2008, TSI (2) Surviving spouse or civil partner trusts, Adding property to a pre 22 March 2006 trust, Adding value to a pre 22 March 2006 trust, important information about trusts document. 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. 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. Moor Place? From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. If so, it means that the beneficiary receives it and the trustees do not. Tax rates and reliefs may be altered. This element requires third party cookies to be enabled. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. We accept no responsibility for the content of these websites, nor do we guarantee their availability. 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 FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. 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? Instead, the value of the trust will form part of the life tenant's taxable estate on their death. IIP trusts are quite common in wills. For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. Kia also has experience of working in industry. Change your settings. Discretionary trust (DT): . Harry has been life tenant of a trust since 2005. The IHT treatment of an IIP trust depends on whether it is created during lifetime or on death. The most common example of enjoying property is the right to reside in a house. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. 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. 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. Does it make any difference how many years after the first trust that the second trust is settled? Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. 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. An OEIC generates income, albeit that with accumulation shares, income is not distributed but instead reinvested and added to capital. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. 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. This will bring the trust into the relevant property regime. The term IIP is not defined in tax legislation. The trustees will acquire assets at their market value at the date of death. It is a register of the beneficial ownership of trusts. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. We do not accept service of court proceedings or other documents by email. Higher and additional rate taxpayers will always have tax to pay but any tax paid by the trustees will meet part of their liability. Tom has been the life tenant of the Tiptop family trust for more than 10 years. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. Note that Table 1 refers to an 'accumulation and maintenance trust'. 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. She remains the current life tenant of the trust. As on previous occasions Mary provided a totally professional, friendly and helpful service.. on attaining a specified age or event). FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. 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. 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. 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). This Fact Sheet has been prepared to provide you with basic information. Where the settlor has retained an interest in property in a settlement (i.e. Investment bonds should not be used to provide an income to a life tenant (e.g. Even so, the distribution remains income for tax purposes. These may be subject to change in the future. Interest in possession trusts created before 22 March 2006 will benefit from a tax free uplift on the death of the life tenant. Where trustees want to utilise holdover relief, they must take care not to pass assets to a beneficiary within the first three months of the trust being created, or within the first three months following a ten yearly IHT charge. Therefore they are not taxed according to the relevant property regime, i.e. Rules introduced on 6 October 2020 extend . 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. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. 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. These cookies enable core website functionality, and can only be disabled by changing your browser preferences. 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. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. These TSIs apply to IIP trusts commencing before 22 March 2006. 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. The trust fund is within the IHT estate of Jane. If the trust comes to an end on the death of the Life Tenant, again the capital value of the trust will be aggregated with the Life Tenants estate to calculate Inheritance Tax due. She is AAT and ATT qualified and is currently studying ACCA. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. The relevant legislation is S49(1A) and S58(1) IHTA 1984. It can be tried in either the magistrates court or the Crown Court. Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. Assets held within an Interest in Possession Trust are treated for Inheritance Tax purposes as if they belong to the Life Tenant. 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. Where value is added after 21 March 2006 this will not result in any of the trust fund becoming relevant property provided the addition is indeed solely of value and not and addition of 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. 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. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). There are two classes of beneficiary actual and potential - with the trustees having the power to replace an actual beneficiary with anyone from the list of potential beneficiaries. Assume the value of those shares increase through capital growth, post 2006. The new beneficiary will have a TSI. Example 1 The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. These rules were abolished as they were no longer considered necessary. Where the life interest in the trust begins immediately after the death of the person creating the trust then it is called an Immediate Post-Death Interest in possession trust (IPDI) by H M Revenue and Customs. 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. 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. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. As a result of IIP and Accumulation & Maintenance Trusts being brought into line with discretionary trusts for IHT purposes, any capital gains on the transfer of chargeable assets into these trusts from 22 March 2006 have become eligible for CGT holdover relief under s260(2)(a) of the Taxes and Chargeable Gains Act 1992 (Gifts on which IHT is chargeable etc.). The calculation of Ginas estate will include the value of the capital underlying the IIP. Issue of redeemable sharesA limited company that proposes to issue redeemable shares must comply with the provisions of the Companies Act 2006 (CA 2006).Why do companies issue redeemable shares?A company may wish to issue redeemable shares so that it has an alternative way to return surplus capital, Amending the articles of associationThis Practice Note summarises the procedure to amend or change a companys articles of association in accordance with the Companies Act 2006 (CA 2006).Why amend the articles?There are many different reasons why a company may want, or be required, to amend its, Working with counselInstructing counsel to advocate on a clients behalf should be a matter of careful thought and preparation. Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. It is then up to the Trustees to decide which beneficiaries receive trust assets, and when this happens. 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. Moor Place Lodge? 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). A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. 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. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. Trust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax on the following occasions: on the death of the beneficiary with the interest in possession on the death of the beneficiary within seven years after a transfer or lifetime termination of his interest This allows the trustees to invest in life policies, such as investment bonds. [4] However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . In essence this is an administrative shortcut. In the past, IIP trusts were subject to estate duty when the beneficiary died. Free trials are only available to individuals based in the UK. Clearly therefore, it is not always necessary for the trust property to produce income. CONTINUE READING
In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. Top-slicing relief is available. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). These beneficiaries are referred to as the remaindermen. 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. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). There is an exception for disabled person's trusts. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. 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. Life Interest Trusts are most commonly used to create and protect interests in a property. The circumstances may not always be so straightforward. A TSI can also arise with life insurance trusts. The trust fund is within the IHT estate of Harriet. This could be in favour of Sallys cousin, who will have a revocable life interest. Trial includes one question to LexisAsk during the length of the trial. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. Also bear in mind that the rates below will apply to the trustees regardless of the level of income and therefore tax bands do not apply. 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. 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. 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. She has a TSI. Trusts for vulnerable beneficiaries are explored here. 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. Full product and service provider details are described on the legal information. Understanding interest in possession trusts. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. Indeed, an IIP frequently exist in assets that do not produce income. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. 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). Consider Clara who created a pre 2006 IIP trust comprising shares for David. 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.