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. Note that Table 1 refers to an 'accumulation and maintenance trust'. If the property is sold, the beneficiary will not be entitled to receive the income from the invested proceeds, so the trust is not a full Life Interest Trust. It can be tried in either the magistrates court or the Crown Court. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. From 17 March 1987 to 21 March 2006, lifetime gifts into IIP trusts qualified as Potentially Exempt Transfers (PETs). Existing user? The person with the IIP has an earlier interest. The outgoing beneficiary should also be removed as a potential future beneficiary to avoid the transaction being regarded as a gift with reservation of benefit and still regarded as being in their estate. Where an individual becomes absolutely entitled to trust property during his or her Lifetime, the trustees will be treated as making a chargeable disposal for CGT. a trust), the income arising is treated as the settlors income for all tax purposes. This means that the crystallisation of capital gains can be deferred until the asset transferred is realised by the trustees (or following a further holdover claim realised by a beneficiary). SC Estates Unit 1 types of estates Estate: legal interest or right in the property Possession: ex: tenants have the right to possession Ownership Interest: right to claim on a property Fee: a form of ownership - means owner has a certain set of rights Title: evidence of ownership Freehold estate: interest in real property for an undetermined length of time Fee simple: ownership conveyed to . If a Life Tenant of the trust is occupying a property owned by the trustees then the trust can mitigate Capital Gains Tax that may arise on the sale of the property by using the main residence relief provisions. To discuss trialling these LexisNexis services please email customer service via our online form. An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . If the settlor does not wish to reclaim the tax from the trustees this could be seen as a further gift. 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 tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. The trustees are only entitled to half the individual annual CGT exempt amount. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. As outlined below, it is possible for trustees to mandate trust income to a beneficiary. 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? 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)? Privacy notice | Disclaimer | Terms of use. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. If the trust is brought to an end during the Life Tenants lifetime so that the trust assets can be paid to other beneficiaries, the Life Tenant is treated as having made a Potentially Exempt Transfer (PET) for Inheritance Tax, equivalent to the capital value of the trust. A life estate is often created as a part of the estate planning process in the United States. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. 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. Does it make any difference how many years after the first trust that the second trust is settled? 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 annual exempt amount is generally half the exemption available to individuals. The trustees exclude the mandated income from the trust and estate tax return and the beneficiary (or, where the settlor has retained an interest, the settlor) includes the income on his/her tax return. 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. If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. Once the IHT estate charge has been calculated, the trustees of the interest in possession trust will be responsible for paying that part of the tax that relates to the settled property. Once the trust is created the trustees will be the legal owners of any trust assets and investments. 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. 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. However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Please share this article with your clients. We use cookies to optimise site functionality and give you the best possible experience. A beneficiary of a trust has an IIP if they have the immediate right to receive the income arising from the trust property, or have the use and enjoyment of it. You can learn more detailed information in our Privacy Policy. This will both save the deceased's family time and help to avoid the estate tax. Assets transferred to trust on the settlor's death will not normally result in a CGT charge. Some trusts are set up so that on the death of the Life Tenant, the trust assets remain held in discretionary trusts for a range of beneficiaries. 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. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. 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. Any change to an IIP beneficiary of a pre-22 March 2006 trust will affect the IHT position of the trust as follows: Replacing the IIP beneficiary with a new IIP. Sign-in
Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. 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. This would not be a PET by Sally as she has no beneficial entitlement to the property in which the interest subsists and the trust fund does not leave the relevant property regime, so there is no exit charge. Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority. Trustees need to be mindful that investments should be suitable. For example, it may allow them to live rent free in a residential property owned by the trust. 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. 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. The 100 annual limit is per parent and per child. The personal allowance, personal savings allowance and the dividend allowance are not available to the trustees. These beneficiaries are referred to as the remaindermen. Note that a Capital Redemption policy is not a life insurance policy. 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. However, this exemption is shared equally between all trusts created by the same settlor, subject to a minimum of one fifth of the trust exemption. 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.). CONTINUE READING
FLITs for IHT purposes are a mixture between an interest in possession and a relevant property 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). Multiple trusts - same day additions, related settlements and Rysaffe planning. 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. A FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. it is in the persons IHT estate. 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. The income tax treatment will depend on whether the trust income is mandated directly to the beneficiary(ies) or is paid to them via the trust. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. The capital supporting the life interest will, of course, continue to form part of the estate of the life tenant in these circumstances. Example of a post 5 October 2008 death of spouse giving rise to a TSI. Thats relevant property. Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. The value of the trust formed part of the estate of the IIP beneficiary. Sometimes there are instructions or arrangements for income to bypass the trustees of an IIP trust. From 22 March 2006, new IIP trusts will fall under the relevant property regime unless the interest is. This can be beneficial particularly where the intended life tenants marginal rate of tax is 40 per cent or lower, in contrast to the increased 50 per cent rate for trustees of discretionary trusts, which will apply after 6 April 2010. 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. However, the house may be rented out, or sold and the proceeds invested to produce an income for the Life Tenant. While the life tenant is alive, the trust is treated as an interest in possession trust. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. If an individual transfers property into a trust, that is a disposal by the settlor at market value even if the settlor retains an interest. This is because by paying the tax which is primarily the responsibility of the trustees as 'donees', there is a further loss to the settlor's estate. Removing or resetting your browser cookies will reset these preferences. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. Read more, 2023 STEP (The Society of Trust and Estate Practitioners) is a company limited by guarantee incorporated in England and Wales. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. Beneficiaries receiving distributions from a trust are entitled to a tax credit for the rate tax paid (or effectively paid) by the trustees in respect of rental, savings income or dividend income. However, Sally loses her job in early 2010 and the trustees want to reinstate her income interest (in part of the fund). This is because the trust is subject to IHT in their estate. Replacing the IIP beneficiary with a new IIP beneficiary on or after 6 October 2008 will be a chargeable lifetime transfer (and may therefore incur a lifetime charge of 20% depending on the value) from the beneficiary that has been replaced. Free trials are only available to individuals based in the UK. 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. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. Any investments owned by the trustees should be carefully managed to reduce this tax burden. Interest In Possession & Resident Nil-Rate Band. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. 2023 Croner-i is authorised and regulated by the Financial Conduct Authority in respect of Insurance Mediation Services, Financial Services Register no. 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. Right of Occupation a right to live in a property for a specified time, or for the beneficiarys lifetime, but usually subject to conditions. Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. On Lionels death the trust fund will be inside his IHT estate. Moor Place? S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. If the death occurs on or after 6 October 2008 and a spouse or civil partner then becomes entitled to the IIP then the spouse's interest will be known as a TSI. 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. The requirement for the trustees to act fairly in making investment decisions with different consequences for different classes of beneficiaries is regarded as preferable to the traditional image of holding scales equally between the income beneficiary and the remainderman. 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). 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. 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. In 2017 HMRC set up the Trust Registration Service. Assume that the trustees opted to give Sallys cousin a revocable life interest. 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. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. Which rules will apply and what options are available to the trustees to rectify the position if the current rules are preferred? Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Top-slicing relief is not available for trustees. It can also apply to cases with a TSI. The 2006 legislation introduced the concept of a TSI. The trustees and executors can make use of the usual exemptions (eg, where trust or estate assets pass to a surviving spouse or to charity), and the transferrable nil rate band rules (where the Life Tenant is a widow or widower), to reduce the tax payable. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. on death or if they have reached a specific age set out in the trust deed etc. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. Therefore, if the IIP terminates or the beneficiary disposes of his/her IIP then a PET arises if the property passes to another individual absolutely. The remainderman of the IIP trust is Peters' daughter. It is a register of the beneficial ownership of trusts.