In correspondence with The Chartered Institute of Taxation, HMRC stated: The beneficiary should return all income on the relevant pages of their tax return, in addition to their direct personal income. We accept no responsibility for the content of these websites, nor do we guarantee their availability. 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. 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. Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. 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 should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. Please share this article with your clients. 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. "Prudential" is a trading name of Prudential Distribution 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. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). What is the CGT treatment of an interest in possession trust? 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). Thats relevant property. allowable letting expenses in a property business). Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. Rules introduced on 6 October 2020 extend . The new beneficiary will have a TSI. Free trials are only available to individuals based in the UK. Many Trusts hold property that is known as 'relevant property'. 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.). 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. 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. A life estate is a very restrictive type of estate that prevents the beneficiary from selling the property that . This could be in favour of Sallys cousin, who will have a revocable life interest. 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). This can make the tax position complex and is normally best avoided. 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. At least one beneficiary will be entitled to all the trust income. 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. It can also apply to cases with a TSI. Google Analytics cookies help us to understand your experience of the website and do not store any personal data. 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). Even so, the distribution remains income for tax purposes. Basic rate taxpayers will have to pay basic rate on mandated income but otherwise the tax paid by the trustees will satisfy their liability. Sign-in This element requires third party cookies to be enabled. 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). Investment bonds should not be used to provide an income to a life tenant (e.g. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. 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. For example, it may allow them to live rent free in a residential property owned by the trust. The trustees may have discretion over where and when to pay capital or it may pass automatically to named beneficiaries when the life interest ends. The trust fund is within the IHT estate of Harriet. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. This will bring the trust into the relevant property regime. Nevertheless, in its Capital Gains Manual HMRC state. This Fact Sheet has been prepared to provide you with basic information. 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 tax efficient flexible arrangement was therefore obtained. 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. 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). To qualify the interest cannot be under a bereaved minors trust or a trust for a disabled person and this must have been the case since the life tenant became entitled to the interest. 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 income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. Remember that personal allowances are available to individuals only and not to trustees. 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. The trust has not qualified as a trust for bereaved minors or a disabled person's interest since the IIP began. 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 right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. 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) Interest in possession (IIP) is a trust law principle that has UK taxation implications. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. 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. On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). This is still the position for IIP trusts which retain that IIP status. Often, trust income will be paid direct to the Life Tenant without passing through the hands of the Trustees. Any investments owned by the trustees should be carefully managed to reduce this tax burden. For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. The assets of the trust were . 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. it is in the persons IHT estate. Assume that the trustees opted to give Sallys cousin a revocable life interest. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. 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. 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. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. 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. 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. 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. Evidence. However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. Registered Office at 5 Central Way, Kildean Business Park, Stirling, FK8 1FT. 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.
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