Lionels life interest will qualify as an IPDI. Immediate Post Death Interest arises from an Interest In Possession (IIP) Trust created by a Will. This can make the tax position complex and is normally best avoided. The beneficiaries of the trust capital will be determined by the trust deed and the decision making powers given to the trustees. 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. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. Copyright 2023 Croner-i Taxwise-Protect. Victor creates an IIP trust where his three children are life tenants. Full product and service provider details are described on the legal information. 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. A qualifying interest in possession means that for inheritance tax purposes, the trust property is treated as though it belongs to the life tenant. The Will would then provide that the property passes to the children. 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. Assets transferred to trust on the settlor's death will not normally result in a CGT charge. Note that Table 1 refers to an 'accumulation and maintenance trust'. An interest in possession (IIP) trust where: The trust is created by a will or under the intestacy rules. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. Signatureless process for onshore bonds content, Heritage servicing and new business tracking, Interest in Possession (IIP) Trusts Taxation, What you need to know about Interest in Possession trusts, Lifetime gifts into IIP trusts prior to 22 March 2006, TSI (1) The transitional period to 5 October 2008, TSI (2) Surviving spouse or civil partner trusts, Adding property to a pre 22 March 2006 trust, Adding value to a pre 22 March 2006 trust, important information about trusts document. Third-Party cookies are set by our partners and help us to improve your experience of the website. Assume the value of those shares increase through capital growth, post 2006. These have the same IHT treatment as discretionary trusts. On 1 March 2009 he dies and his wife Jane becomes entitled to the IIP (a successor interest). The settlor of a settlor interested IIP gets no relief for TMEs. You can learn more detailed information in our Privacy Policy. 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. Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. The beneficiary both receives the income and is entitled to it. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. Trial includes one question to LexisAsk during the length of the trial. 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 annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). 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. [4] Other beneficiaries do not. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. . Indeed, an IIP frequently exist in assets that do not produce income. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. as though they are discretionary trusts. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. Example of IIP beneficiary being a minor child of the settlor. 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. S629 applies to treat the income of the two minor children as that of Victor because the income belongs to the minor children. For example, where there is a life tenant entitled to income during their life and a second class (the remaindermen) entitled to capital on the death of the life tenant, then it would be unfair to the life tenant if the trustees were to invest in assets which produced little or no income, but offered the prospect of greater than usual capital growth. Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. The settlor has the right to reclaim any tax they suffer from the trustees, and while they have this right it will be included in their estate for IHT. HMRC will effectively treat the addition as a new settlement. Example of IHT arising on death of the income beneficiary. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. The beneficiary with the right to enjoy the trust property for the time being is said . If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. Even if the trustees have a power of appointment, and can terminate the original life tenants interest if they so desire, they will be outside the scope of the relevant property regime. 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. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. 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. The implications of this are outlined below. The trust is classed as a relevant property trust which means that periodic charges apply every 10 years and exit charges when capital is paid out to beneficiaries. If however the income beneficiarys interest comes to an end on or after 22 March 2006 and the property remains in trust, then the outgoing beneficiary is treated as making a Chargeable Lifetime Transfer (CLT) based on the trust fund value at that time, and the trust will become subject to the relevant property regime. An allowed variation is one that takes place via the exercise of pre 22 March 2006 rights under the contract. These TSIs apply to IIP trusts commencing before 22 March 2006. 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. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. 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. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. Moor Place? Issue of redeemable sharesA limited company that proposes to issue redeemable shares must comply with the provisions of the Companies Act 2006 (CA 2006).Why do companies issue redeemable shares?A company may wish to issue redeemable shares so that it has an alternative way to return surplus capital, Amending the articles of associationThis Practice Note summarises the procedure to amend or change a companys articles of association in accordance with the Companies Act 2006 (CA 2006).Why amend the articles?There are many different reasons why a company may want, or be required, to amend its, Working with counselInstructing counsel to advocate on a clients behalf should be a matter of careful thought and preparation. Trusts set up on the death of a parent for their minor children (known as 'bereaved minors trusts' and '18 - 25 trusts') will also benefit from holdover relief when the beneficiary attains the relevant age. 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. The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. Trusts for vulnerable beneficiaries are explored here. Trustees Management Expenses (TMEs) are however different. For example, it may allow them to live rent free in a residential property owned by the trust. 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. IIP trusts are quite common in wills. IIP trusts created on death are not treated as 'relevant property' and so the trust will not be subject to periodic or exit charges. 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. However . IIP trusts may be created during lifetime or on death. The trustees will acquire assets at their market value at the date of death. The Trustees do not qualify for a dividend allowance or savings allowance. 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 contrast, because of the inheritance tax charge that may arise on the lifetime termination of a qualifying interest in possession onto continuing trusts, even when in favour of a spouse/civil partner, trustees will need to think carefully before taking action. As a result, S46A IHTA 1984 was introduced. 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. Kirsteen who is married to Lionel has three children from a previous relationship. There are 3 sets of circumstances when this may arise as covered in the next 3 sections. That income will retain its nature meaning that the tax due by the beneficiary will reflect the dividend nil rate allowance, the starting rate for savings income and the personal savings allowance as appropriate. An interest in possession in trust property exists where . We may terminate this trial at any time or decide not to give a trial, for any reason. Discretionary trust (DT): . In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). Click here for a full list of third-party plugins used on this site. Is the value to be settled the loss to their estate rather than the value of a particular per centof the property? The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. It grants the life tenant ownership of property without having to include it in the will as part of their assets. Even so, the distribution remains income for tax purposes. In essence this is an administrative shortcut. There are two classes of beneficiary actual and potential - with the trustees having the power to replace an actual beneficiary with anyone from the list of potential beneficiaries. 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). On trust for my wife Alison for life, thereafter to my children Brian, Catriona and David in equal shares absolutely. This could be in favour of Sallys cousin, who will have a revocable life interest. 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. My VIP Tax Team question of the week: Mixed Partnerships, My VIP Tax Team question of the week: Associated Company rules from 01.04.23, My VIP Tax Team question of the week: PPR & Transfers.