It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. 951415. Sometimes there are instructions or arrangements for income to bypass the trustees of an IIP trust. 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. Example of IHT arising on death of the income beneficiary. In her will she includes a provision stating that her estate will pass to trustees where Lionel will have a life interest (entitled to income) and on his death the capital will pass absolutely to her three children. The circumstances may not always be so straightforward. Or this could be carried out in favour of Sallys cousin absolutely, which gives rise to an exit charge assessable on the trustees, as the assets in the trust fund are leaving the settlement (assuming no available reliefs). Therefore, providing that changes in the holders of the IIP take place on death then these provisions allow all subsequent holders to be treated under the pre 22 March 2006 rules. Terminating an income interest in possession, which is within the relevant property regime, has no inheritance tax consequences provided the assets remain in trust. For financial advisers - compiled by our team of experts, qualified in pensions, taxation, trusts and wealth transfer. 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). 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. 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. Prior to the IHT changes to trusts on 22 March 2006, it was common practice to use a form of IIP trust with life policies, including investment bonds. 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). A step child includes the child of a civil partner. 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. 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). The life tenant has a life interest and remainderman is the capital . The assets of the trust were . The implications of this are outlined below. To control which cookies are set, click Settings. 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. This is a right to live in a property, sometimes for life, but more often for a shorter period. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. Nevertheless, in its Capital Gains Manual HMRC state. This does not include the former spouse/civil partner and so trusts set up for a widow(er) will not be affected. Full product and service provider details are described on the legal information. On Lionels death the trust fund will be inside his IHT estate. So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. 22 March 2006 is a key date regarding the taxation of IIP Trusts. There is an exception for disabled person's trusts. 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. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. As noted above, the longstanding principle with an IIP is that trust fund falls inside the estate of the deceased beneficiary for IHT purposes. Interest in Possession (IIP) when a beneficiary has a present right of present enjoyment in the net income of the Trust property without any further decision of the trustees being required. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. This encompasses not only the composition of portfolios, but also their tax-efficiency and associated administrative costs. 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. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. S8K IHTA 1984 defines a direct descendant as the deceased persons child, grandchild or other lineal descendant, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner), a child who is, or was at any time, their step-child, their adopted child, a child who was fostered at any time by them, a child where theyre appointed as a guardian or special guardian when the child is under 18. 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. Kiya previously worked in inheritance tax for a large accountancy firm where she dealt with accounts and various returns for trusts. The IHT is calculated as follows: . 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. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. 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 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. In 2017 HMRC set up the Trust Registration Service. 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. Evidence. Privacy notice | Disclaimer | Terms of use. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. 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. As gifts into trust since 21 March 2006 will be CLTs, settlors may elect for 'holdover' relief. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? Wards Solicitors is a trading name of Wards Solicitors LLP which is a limited liability partnership registered in England and Wales (registered number OC417965) and authorised and regulated by the Solicitors Regulation Authority under number 646117. The 2006 legislation introduced the concept of a TSI. From 22 March 2006 there are only three types of new IIP qualifying trusts an Immediate Post Death Interest, a Disabled Persons Interest, or a Transitional Serial Interest. High Court sets aside Will of elderly man whose mind was poisoned by his daughter, What we can all learn from King Charles Inheritance Tax liabilities. 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. 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. The house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. A closer look at when a beneficiary has a life interest in the income of a trust fund. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. 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). For tax purposes, the Life Tenant has an Interest in Possession. 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. Once the trust is created the trustees will be the legal owners of any trust assets and investments. 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. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. Remember that personal allowances are available to individuals only and not to trustees. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. The life tenant only has an automatic entitlement to trust income and not capital. The settlor of a settlor interested IIP gets no relief for TMEs. On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). 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). The technology to maintain this privacy management relies on cookie identifiers. Multiple trusts - same day additions, related settlements and Rysaffe planning. If the trust is wound up after the death of the Life Tenant, then the assets distributed will be subject to an Inheritance Tax assessment and an exit charge may be payable if the value of the Trust exceeds the Nil Rate Band. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. 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. We do not accept service of court proceedings or other documents by email. The new beneficiary will have a TSI. 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. The IHT liability is split between Ginas free estate and the IIP trustees as follows. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. on attaining a specified age or event). 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. Many Trusts hold property that is known as 'relevant property'. If a settlor sets up two discretionary trusts several years apart for different groups of beneficiaries, does each trust have its own nil rate band for the purposes of the principal and exit charges under the relevant property regime (assuming there have been no other potentially exempt transfers or lifetime chargeable transfers)? CONTINUE READING 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. 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). The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. 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 value of tax reliefs to the investor depends on their financial circumstances. These beneficiaries are referred to as the remaindermen. Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. If trust income passes directly or indirectly (for example, through an investment manager) to a beneficiary without going via the trustees the beneficiary needs to ensure that it is returned correctly on his/her tax return. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. In contrast bonds are non-income producing investments and withdrawals are a return of capital not income. Please share this article with your clients. Interest in possession (IIP) is a trust law principle that has UK taxation implications. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. The beneficiary both receives the income and is entitled to it. It would generally be simpler to make further gifts to a new trust.