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. In contrast bonds are non-income producing investments and withdrawals are a return of capital not income. The new beneficiary will have a TSI. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. a new-style life interest, i.e. 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). Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. 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. If the settlor does not wish to reclaim the tax from the trustees this could be seen as a further gift. The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). This website describes products and services provided by subsidiaries of abrdn group. 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. 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. Tom has been the life tenant of the Tiptop family trust for more than 10 years. 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. Thats relevant property. Gifts into these trusts were potentially exempt transfers (PETs) rather than CLTs. You will not appear to benefit from the residence nil-rate band (RNRB) as the interest is not going to direct descendants, but initially into trust for your spouse. An OEIC generates income, albeit that with accumulation shares, income is not distributed but instead reinvested and added to capital. 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. 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. It can be tried in either the magistrates court or the Crown Court. 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. A tax efficient flexible arrangement was therefore obtained. 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. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. The Trustees do not qualify for a dividend allowance or savings allowance. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. Once the trust is created the trustees will be the legal owners of any trust assets and investments. Clearly therefore, it is not always necessary for the trust property to produce income. This does not include nephews, nieces, siblings, and other relatives. Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. 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. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). Understanding interest in possession trusts. 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. 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. However . When a chargeable event occurs any gain will be assessed to income tax on: * The liability remains with the settlor throughout the tax year of their death. 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. Top-slicing relief is not available for trustees. Instead, a revaluation will occur, the trustees or new owner will be treated as acquiring the assets at the uplifted market value and any gain held over on the creation of the . For example, a husband owning the family home may want to make sure that his wife is able to remain living in the property after his death, even though the house itself has been left to their children. The value of tax reliefs to the investor depends on their financial circumstances. 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. Moor Place? These rules were abolished as they were no longer considered necessary. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. The main CGT rate for trustees and personal representatives is currently 20% though there is a 28% rate for gains on residential property not eligible for private residence relief. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. 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. Broadly speaking, a person has an interest in possession in property if he or she has the immediate right to receive any income arising from it or to the use or enjoyment of the property. 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, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. 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). 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. 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). Many Trusts hold property that is known as 'relevant property'. 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. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. 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. Remember that personal allowances are available to individuals only and not to trustees. Amanda Edwards TEP is a Solicitor with Boodle Hatfield. However, trustees will not be able to deduct any expenses from mandated income. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. These beneficiaries are referred to as the remaindermen. 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. 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. All transfers into IIP trusts on or after 22 March 2006 are treated as chargeable transfers and are taxed in the same way as relevant property trusts. The relevant legislation is S49(1A) and S58(1) IHTA 1984. Privacy notice | Disclaimer | Terms of use. The trust has not qualified as a trust for bereaved minors or a disabled person's interest since the IIP began. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. S629 does not apply to a childs trust income in any tax year if, in that year, the total amount of income does not exceed 100. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? Where the liability falls on the trustees, the trust rate applies. A life interest trust (also known as "an interest in possession trust") is an arrangement recognised by English law under which someone is given the right to use an asset (usually a house) for the rest of their life without ever becoming the owner of the underlying capital. 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. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). The role of counsel is to provide independent objective advice and to deploy the skill of advocacy on behalf of the client. If the asset remains in the trust, it will be held on bare trust and no longer regarded as a settlement for IHT. This commends consideration of tax wrappers such as investment bonds and OEICs which are at opposite ends of the investment spectrum. 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. He dies in 2020 and his wife Wendy then takes an IIP her interest will be a TSI and because her estate is increased, spouse exemption is available. 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) Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. . Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. The trust itself will also be subject to periodic and exit charges. For tax purposes, the inter-spouse exemption applied on Ivans death. 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? So, S46A applies to pre 22 March 2006 trusts where the life policy contract was entered into before that date. To control which cookies are set, click Settings. She is AAT and ATT qualified and is currently studying ACCA. Example 1 Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. Moor Place Lodge? Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. This site is protected by reCAPTCHA. The income, when distributed to them, retains its source nature, for example, dividend or interest. Nevertheless, in its Capital Gains Manual HMRC state. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. 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. Please share this article with your clients. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. Even so, the distribution remains income for tax purposes.