22 March 2006 is a key date regarding the taxation of IIP Trusts. Life Interests and termination effects - Wills and Trusts and Tenants This field is for validation purposes and should be left unchanged. The value of tax reliefs to the investor depends on their financial circumstances. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried child. 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 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. SC Estates.docx - SC Estates Unit 1 types of estates Interest in possession trusts - abrdn Investment bonds should not be used to provide an income to a life tenant (e.g. 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.). Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. These TSIs apply to IIP trusts commencing before 22 March 2006. On Lionels death the trust fund will be inside his IHT estate. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. HS294 Trusts and Capital Gains Tax (2020) - GOV.UK You can learn more detailed information in our Privacy Policy. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). Example of IIP beneficiary being a minor child of the settlor. 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. 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. Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. 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. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. The life tenant has a life interest and remainderman is the capital . 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. Increasingly, we are likely to see fewer lifetime terminations of qualifying interests in possession (in the absence of reliefs, such as business property relief and agricultural property relief). A tax efficient flexible arrangement was therefore obtained. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. 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. Does a life interest will trust need to be registered with HMRC? We do not accept service of court proceedings or other documents by email. There are, of course, other ways in which an Immediate Post Death Interest can be used. If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. It is not to be treated as a substitute for getting full and specific advice from Wards. The technology to maintain this privacy management relies on cookie identifiers. The trusts were not subject to the relevant property regime of periodic and exit charges. As outlined below, it is possible for trustees to mandate trust income to a beneficiary. The relevant legislation is S49(1A) and S58(1) IHTA 1984. The 2006 legislation introduced the concept of a TSI. 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). The settlor of a settlor interested IIP gets no relief for TMEs. 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. However, trustees will not be able to deduct any expenses from mandated income. The trustees have the power to pay income and often capital to the life tenant. The content displayed here is subject to our disclaimer. However . 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. The beneficiary should use SA107 Trusts etc. This is a bit niche! Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). 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. 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. Qualifying interest in possession trustsIHT treatment 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) This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. Interest In Possession & Resident Nil-Rate Band. 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. For example, they can take into account the income needs of the life tenant or the fact that the tenant was a person known to the settlor and a primary object of the trust whereas the remainderman might be a remoter relative. If so, it means that the beneficiary receives it and the trustees do not. 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. Setting the scene | Tax Adviser 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. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. 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. 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). 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. 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). Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? Lifetime termination of an interest in possession | STEP 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. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. 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. 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. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? For example, where there is a life tenant entitled to income during their life and a second class (the remaindermen) entitled to capital on the death of the life tenant, then it would be unfair to the life tenant if the trustees were to invest in assets which produced little or no income, but offered the prospect of greater than usual capital growth. As a result, S46A IHTA 1984 was introduced. Most trusts offered by product providers are not settlor interested. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). Typically, the life tenant receives a right to enjoy the benefit of an asset until death, at which stage the asset passes to a remainderman. 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? 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. 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. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. What Is a Life Estate? - Investopedia 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? e.g. 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. 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. 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. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. 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. Interest In Possession Trust in March 2023 - Help & Advice This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. Typically, the surviving spouse is given the right to trust income for their lifetime (or the right to occupy the marital home) with the capital passing on death to designated children. 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. Beneficiaries can use their personal allowance, savings rate band, personal savings allowance and dividend allowance where available against trust income. 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. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. "Prudential" is a trading name of Prudential Distribution Limited. 951415. 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 subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. 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. Kirsteen who is married to Lionel has three children from a previous relationship. How is the income of an interest in possession trust taxed? 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. 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. Where a number of trusts have been created since 6 June 1978 by the same settlor, the trustees exemption is divided equally between them, subject to a minimum exemption of one fifth of the available amount. Back to Basics - Flexible Life Interest Trust (FLIT) The trust has not qualified as a trust for bereaved minors or a disabled person's interest since the IIP began. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. 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. Please share this article with your clients. Life Interest Trusts are most commonly used to create and protect interests in a property. Property in which a QIIP subsists is not relevant property so it is not subject to principal and exit charges during the life of the trust. 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). Note that a Capital Redemption policy is not a life insurance policy. 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. Multiple trusts - same day additions, related settlements and Rysaffe planning. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. 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. The spousal exemption will apply to these funds passing on Kirsteens death. 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. 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 leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. 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. Residence nil rate band - abrdn Discretionary trust (DT): . As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. As on previous occasions Mary provided a totally professional, friendly and helpful service.. Harry has been life tenant of a trust since 2005. 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. On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). The income beneficiary has a life interest or life rent. To control which cookies are set, click Settings. 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. The trustees are only entitled to half the individual annual CGT exempt amount. Immediate Post Death Interest arises from an Interest In Possession (IIP) Trust created by a Will. What are FLITs. Click here for the customer website. She remains the current life tenant of the trust. With regard to the existing life interest, the crucial factor is whether it is: 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 tenants inheritance tax estate and is a transfer of value (section 52). For tax purposes, the Life Tenant has an Interest in Possession. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. Registered number: 2632423. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. Interest in Possession trust (IIP): The beneficiaries, sometime referred to as life-tenants are absolutely entitled to the income of the trust as it arises (net of income tax and the income expenses of the trust). These beneficiaries are referred to as the remaindermen. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. Does it make any difference how many years after the first trust that the second trust is settled? If income paid to or for the benefit of the child exceeds 100 per annum, all trust income will be assessed on the settlor. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. 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. It can be tried in either the magistrates court or the Crown Court. It is a register of the beneficial ownership of trusts. She has a TSI. Google Analytics cookies help us to understand your experience of the website and do not store any personal data. Life Interests and Rights of Occupation - Wards Solicitors Prudential Distribution Limited is registered in Scotland. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company Limited. 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. The relief can also be claimed if the gift is of business assets. Indeed, an IIP frequently exist in assets that do not produce income. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. Trustees need to be mindful that investments should be suitable. It is then up to the Trustees to decide which beneficiaries receive trust assets, and when this happens. We accept no responsibility for the content of these websites, nor do we guarantee their availability. Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. As such, the property doesn't go through the probate process. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. Moor Place? Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. Other beneficiaries do not. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. Two of three children are minors. It can also apply to cases with a TSI. 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. Any investments owned by the trustees should be carefully managed to reduce this tax burden. 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. 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. This is because the trust is subject to IHT in their estate. Will payments be treated as 'same-day additions' under IHTA 1984, s 62A, for the purpose of calculating ongoing IHT charges on pilot trusts, where an employee is a member of a contractual contributory pension scheme and that employee has requested that the administrators divide funds to several pilot trusts set up by that employee on different days during his lifetime so that the total funds in each pilot trust remains under the IHT nil rate band? 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? 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. 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. These may be subject to change in the future. Trusts can be created by either the transfer of cash to the trustees, or by the transfer of an actual asset, such as an existing insurance bond or portfolio of shares/mutual funds. The house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. Providing your spouse occupies the trust property as their residence, then the RNRB's mentioned above should be available. There are special rules for life policy trusts set out later. Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. Gordon made a PET on 1 October 2008 subject to the 7 year rule. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. Therefore a more detailed review of your particular circumstances would be required before a definitive answer could be provided. If the trustees dispose of trust assets (for example, if they sell a mutual fund or a property) the gains are calculated in the same way as for an individual and taxed at the trust rate of CGT. 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). Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. Existing user? The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. There should not, for example, be a requirement for trustees to follow a mechanical rule for preserving the real value of the capital when the life tenant was the deceaseds widow who had fallen on hard times when the remainderman was young and well off. 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.