The IHT is calculated as follows: . 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). However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. 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. Example of IIP beneficiary being a minor child of the settlor. The life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). FLITs are essentially a life interest for a person (usually the surviving spouse), with an underlying discretionary trust that will arise when the surviving spouse dies. 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. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. A FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. Full product and service provider details are described on the legal information. Essentially, if the TSI rules apply in a given scenario, then the IIP that someone is becoming entitled to on or after 22 March 2006 will be taxed under pre 22 March 2006 rules. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. * Statutory references are to Inheritance Tax Act 1984 unless otherwise stated. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. 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. 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. This means that the crystallisation of capital gains can be deferred until the asset transferred is realised by the trustees (or following a further holdover claim realised by a beneficiary). If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. The 100 annual limit is per parent and per child. Clearly therefore, it is not always necessary for the trust property to produce income. The RNRB applies when a qualifying residential property interest is inherited by a direct descendant. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. 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). The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. 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. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. For all our latest news and advice sign up to our Enewsletter below. 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. 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 tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). The trustees exclude the mandated income from the trust and estate tax return and the beneficiary (or, where the settlor has retained an interest, the settlor) includes the income on his/her tax return. Google Analytics cookies help us to understand your experience of the website and do not store any personal data. The circumstances may not always be so straightforward. The payment of ongoing premiums or the exercise of an existing policy option to increase the benefit or extend the term does not cause a problem. 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). Existing user? Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. The beneficiary with the right to enjoy the trust property for the time being is said . Gordon has had a life interest (the prior interest) under an IIP trust since 1 July 2000. 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). There is a chargeable transfer by the deceased unless the IIP is for the spouse or civil partner in which case it is an exempt transfer. A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . Beneficiaries receiving distributions from a trust are entitled to a tax credit for the rate tax paid (or effectively paid) by the trustees in respect of rental, savings income or dividend income. IIP trusts may be created during lifetime or on death. 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. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. 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. 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. 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? 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. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. 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. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. Would a revocable appointment of a real property out of a life interest trust to an individual (absolutely) pre-2006 have created an interest in possession for the appointee? Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? It will not become subject to the relevant property regime. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. Taxation of the Assets held in the IPDI Trust. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. Nevertheless, in its Capital Gains Manual HMRC state. 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. Often, IPDI Trusts do not generate any income because the only trust asset is a house in which the Life Tenant lives. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. The trust is classed as a relevant property trust which means that periodic charges apply every 10 years and exit charges when capital is paid out to beneficiaries. If however the income beneficiarys interest comes to an end on or after 22 March 2006 and the property remains in trust, then the outgoing beneficiary is treated as making a Chargeable Lifetime Transfer (CLT) based on the trust fund value at that time, and the trust will become subject to the relevant property regime. The term IIP is not defined in tax legislation. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. Click here for a full list of Google Analytics cookies used on this site. If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. If so, it means that the beneficiary receives it and the trustees do not. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. In other words, there was a window between 22 March 2006 and 5 October 2008 when a beneficiary of an IIP trust could pass on that interest to others such as children. An interest in possession in trust property exists where . We accept no responsibility for the content of these websites, nor do we guarantee their availability. Similarly, S629 ITTOIA 2005 applies to situations where the IIP beneficiary is a minor child or step child of the settlor (who is neither married nor in a civil partnership). The trustees and executors can make use of the usual exemptions (eg, where trust or estate assets pass to a surviving spouse or to charity), and the transferrable nil rate band rules (where the Life Tenant is a widow or widower), to reduce the tax payable. Any change to an IIP beneficiary of a pre-22 March 2006 trust will affect the IHT position of the trust as follows: Replacing the IIP beneficiary with a new IIP. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. CONTINUE READING 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). For UK financial advisers only, not approved for use by retail customers. 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. If investment income is not mandated to the beneficiary then the trustees are liable for income tax at the basic rate regardless of how much or how little income arises. She is AAT and ATT qualified and is currently studying ACCA. She was widowed twice and was left the right to live in her 2nd husbands house on his death (i.e. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. 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. 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). In other words, for IIPs arising after 21 March 2006, other than the categories of TSIs described above, the income beneficiary will only have the trust fund inside their estate where the interest is. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). This would be a chargeable lifetime transfer, and they should notify the trustees who may need to account for any IHT. Sign-in Privacy notice | Disclaimer | Terms of use. Also, in cases where one beneficiary is entitled to income and others entitled to capital, then the trustees could diversify the trust fund, perhaps by investing in a mixture of OEICs to suit the income needs of one beneficiary, and insurance bonds to provide capital for the others. On the death of your spouse as the life tenant, as the main residence is deemed to be part of your spouses estate and is inherited by direct descendants of your spouse then the RNRB is available both your spouses RNRB and your transferred RNRB subject to meeting other conditions. This continues to be the case for IIP trusts created before 22 March 2006 providing the income beneficiary is still in place though see Transitional Serial Interests below. We do not accept service of court proceedings or other documents by email. 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. 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. 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. Prudential Distribution Limited is registered in Scotland. Authorised and regulated by the Financial Conduct Authority. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. The income, when distributed to them, retains its source nature, for example, dividend or interest. The annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). 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. For tax purposes, the Life Tenant has an Interest in Possession. It can be tried in either the magistrates court or the Crown Court. 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. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. Interest in possession (IIP) is a trust law principle that has UK taxation implications. 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. Note however that an administrative power to withhold income to pay advice fees, or withhold income to pay for the upkeep and repair of a trust property would not affect the existence of an IIP. 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. Instead, the value of the trust will form part of the life tenant's taxable estate on their death. In essence this is an administrative shortcut. It would generally be simpler to make further gifts to a new trust. She has a TSI. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). Any subsequent changes made once the trust has become relevant property will not be a transfer of value for IHT. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. Copyright 2023 Croner-i Taxwise-Protect. For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. The spousal exemption will apply to these funds passing on Kirsteens death. 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). Other assets transferred into trust while the settlor is still alive will be a disposal for CGT with any gain being assessed on the settlor. Rules introduced on 6 October 2020 extend . During the lifetime of the Life Tenant, the Trust is not subject to 10 yearly charges or charges when an asset leaves the trust, unlike the tax treatment of Discretionary Trusts. Change your settings. These beneficiaries are referred to as the remaindermen. As outlined below, it is possible for trustees to mandate trust income to a beneficiary. 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. 22 March 2006 is a key date regarding the taxation of IIP Trusts. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. On Lionels death the trust fund will be inside his IHT estate. a new-style life interest, i.e. Making a lifetime appointment from an IIP beneficiary to another beneficiary absolutely will be a PET by the outgoing beneficiary (or an exempt transfer if the interest passes to the spouse or civil partner) whether this is done before or after 6 October 2008. Whilst the life tenant of a FLIT is alive, the property is . If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. The implications of this are outlined below. 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. Example of a post 5 October 2008 death of spouse giving rise to a TSI. The settlor names 'default' beneficiaries who are entitled to any trust income, and ultimately to capital when the trust ends unless the trustees exercise their powers to appoint capital during the life of the trust, or change the default beneficiaries.