The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. The new beneficiary will have a TSI. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. Click here for a full list of Google Analytics cookies used on this site. These are usually referred to as life interest trusts (or life rent in Scotland). Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. Edward & Fiona) who were entitled to the income generated by the trust assets and allowed a discretionary class whereby the trustees could choose to allocate the capital to anyone in either class. The circumstances may not always be so straightforward. Example 1 Please choose an optionGoogle SearchBing SearchGoogle AdvertLaw Society WebsitePersonal/Friend RecommendationProfessional RecommendationSocial MediaThomson LocalYellow Pages/Yell.comOther, Please choose an optionBristolKeynshamBradley StokeHenleazeWorleThornburyYateClevedonPortisheadStaple HillNailseaWeston-super-MareN/A. If however the stocks and shares have been mixed, then an apportionment will be required. 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. 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 . Income received by the Trust should strictly be declared by the Trustees. 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. This regime is explored here. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. For all our latest news and advice sign up to our Enewsletter below. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. The remainderman of the IIP trust is Peters' daughter. Kirsteen who is married to Lionel has three children from a previous relationship. 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. Understanding interest in possession trusts. 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. However, if there were any gains held over on creation of the trust (which could only apply if the assets were business assets) their death will bring the held over amount into charge. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. If the life tenant dies while the settlor is still living and the interest in possession reverts to the settlor on the life tenant's death, the value of the trust property is left out of account . Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. 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. Please share this article with your clients. Life Interest Trusts are most commonly used to create and protect interests in a property. 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. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. Either a premium was paid on or after 22 March 2006 or an allowed variation is made to the contract on or after that day. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. 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. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. 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). Any further gifts made to an interest in possession trust that was in force prior to 22 March 2006 will be treated as relevant property. All rights reserved. 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. 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. 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 life tenant obtains the IIP on the death of the testator (if there is a will) or intestate (if there is no will). In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. 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). Where the settlor has retained an interest in property in a settlement (i.e. 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. This does not include the former spouse/civil partner and so trusts set up for a widow(er) will not be affected. These rules were abolished as they were no longer considered necessary. The IHT treatment of an IIP trust depends on whether it is created during lifetime or on death. For example, it may allow them to live rent free in a residential property owned by the trust. This will bring the trust into the relevant property regime. What are FLITs. 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)? 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. This is a right to live in a property, sometimes for life, but more often for a shorter period. This site is protected by reCAPTCHA. There are special rules for life policy trusts set out later. Note that Table 1 refers to an 'accumulation and maintenance trust'. 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. Consider Clara who created a pre 2006 IIP trust comprising shares for David. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. These may be subject to change in the future. Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. Lionels life interest will qualify as an IPDI. Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. As a consequence, new, flexible insurance company trusts (other than bare trust) created on or after 22 March 2006, even if expressed in terms of IIP trusts, are taxed under the relevant property regime. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. If the settlor does not wish to reclaim the tax from the trustees this could be seen as a further gift. 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). Trustees must hold the balance fairly between different categories of beneficiary. The beneficiary both receives the income and is entitled to it. If prior to 6 October 2008, the pre 22 March 2006 IIP came to an end while the income beneficiary was still alive to be replaced by a new beneficiary, then that new beneficiary will be taxed under the pre 22 March 2006 rules. The assets of the trust were . Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. Two of three children are minors. 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? Clearly therefore, it is not always necessary for the trust property to produce income. as though they are discretionary trusts. 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. Flexible Life Interest Trust A Life Interest Trust where the trustees are given powers to advance capital from the trust to beneficiaries, including the Life Tenant, during their lifetime. 22 March 2006 is a key date regarding the taxation of IIP Trusts. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. 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. This remains the case provided there is no change to the IIP beneficiary. 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). As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. The term IIP is not defined in tax legislation. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. 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. Therefore they are not taxed according to the relevant property regime, i.e. The legislation for this is S624 ITTOIA 2005. If the value of the trust and the estate together exceed the Nil Rate Band tax will be due at 40% on any excess and this will be apportioned between the trust and the estate. 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. It can also apply to cases with a TSI. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. The beneficiary should use SA107 Trusts etc. 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? Life Interest Trust where a beneficiary is given an interest in trust assets for their lifetime, usually the entitlement to receive income, and/or live in a property owned by the trust. Prudential Distribution Limited is registered in Scotland. Multiple trusts - same day additions, related settlements and Rysaffe planning.
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