As Sally is now 25 and earning her own living, the trustees would like to consider benefiting other members of the family and terminating her life interest. The annual exempt amount is generally half the exemption available to individuals. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. This is a right to live in a property, sometimes for life, but more often for a shorter period. This is the regime which traditionally applied to discretionary trusts where there are potential, entry, exit, and periodic charges. Note that Table 1 refers to an 'accumulation and maintenance trust'. She has a TSI. This regime is explored here. 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. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. The circumstances may not always be so straightforward. Gordon made a PET on 1 October 2008 subject to the 7 year rule. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. The beneficiary should use SA107 Trusts etc. a trust), the income arising is treated as the settlors income for all tax purposes. Access this content for free with a trial of LexisNexis and benefit from: To view the latest version of this document and thousands of others like it, sign-in with LexisNexis or register for a free trial. For example, include: However, if income bypasses the trustees and the trust: then the settlor includes the income on his or her personal return. The new beneficiary will have a TSI. A disabled persons trust was set up after 8 April 2013, but the trust documentation refers to the pre-2013 rules requiring half of the trust capital applied during the disabled persons lifetime to be applied for their benefit. The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. Do I really need a solicitor for probate? The beneficiary with the right to enjoy the trust property for the time being is said . Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. Moor Place? Taxation of the Assets held in the IPDI Trust. In other words, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. If however the stocks and shares have been mixed, then an apportionment will be required. Sometimes there are instructions or arrangements for income to bypass the trustees of an IIP trust. The Prudential Assurance Company Limited and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plcwhich is a holding company registered in England and Wales with registered number 11444019 andregistered office at 10 Fenchurch Avenue, London EC3M 5AG, some of whose subsidiaries are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. Although they are part of a team, they also, AffrayAffray is an offence created by the Public Order Act 1986 (POA 1986). Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. It is not to be treated as a substitute for getting full and specific advice from Wards. The Google Privacy Policy and Terms of Service apply. 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. Top-slicing relief is not available for trustees. 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). In such a case there is no statutory basis for taxing the trustees as being in receipt of the income. 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. An interest in possession in trust property exists where . 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 Fact Sheet has been prepared to provide you with basic information. Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. The trustees are only entitled to half the individual annual CGT exempt amount. However, CGT can be postponed, or 'held over', at the time of transfer if it is also a chargeable lifetime transfer for IHT. The settlor of a settlor interested IIP gets no relief for TMEs. There are special rules for life policy trusts set out later. Since 22 March 2006, lifetime gifts to most IIP trusts are chargeable transfers for IHT. 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. At least one beneficiary will be entitled to all the trust income. 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. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. If these conditions are satisfied then it is classed as an immediate post death interest. This re-basing facility ceased for most IIP trusts created on or after 22 March 2006 and consequently, as from that date, the death of a beneficiary will not give rise to any CGT re-basing. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. 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. As outlined above, the income of an IIP trust belongs to the beneficiary as it arises. Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. Privacy notice | Disclaimer | Terms of use. Even so, the distribution remains income for tax purposes. Under current rules, the maximum tax rate applicable to the exit charge would be 6% of the value of any assets exceeding the Nil Rate Band. Removing or resetting your browser cookies will reset these preferences. Property in which a QIIP subsists is not relevant property so it is not subject to principal and exit charges during the life of the trust. "Prudential" is a trading name of Prudential Distribution Limited. See Practice Note: The meaning of relevant property for details. The annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). The income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. 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). In this case, the Life Tenant may declare income received direct by them on their own tax return and the Trustees would not include it on the Trust tax return. 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. 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. 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. 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. 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. These may be subject to change in the future. as though they are discretionary trusts. Trust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax on the following occasions: on the death of the beneficiary with the interest in possession on the death of the beneficiary within seven years after a transfer or lifetime termination of his interest Examples of this are where the IIP beneficiary is a spouse, civil partner or minor child of the settlor. Increasingly, we are likely to see fewer lifetime terminations of qualifying interests in possession (in the absence of reliefs, such as business property relief and agricultural property relief). The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. Multiple trusts - same day additions, related settlements and Rysaffe planning. Trustees can also claim principal private residence (PPR) relief on the disposal of residential property that has been occupied by a beneficiary of the trust as their only or main residence. For tax purposes, the Life Tenant has an Interest in Possession. 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). For further information about QIIPs, see Practice Note: The meaning of qualifying interest in possession. 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. Replacing the IIP beneficiary with an absolute interest. Right of Occupation a right to live in a property for a specified time, or for the beneficiarys lifetime, but usually subject to conditions. e.g. The trustees might have maintained separate funds for the two additions of the stocks and shares with the values clear for each. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. We accept no responsibility for the content of these websites, nor do we guarantee their availability. For example, it may allow them to live rent free in a residential property owned by the trust. 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. In correspondence with The Chartered Institute of Taxation, HMRC stated: The beneficiary should return all income on the relevant pages of their tax return, in addition to their direct personal income. This occurs where there is a pre 22 March 2006 IIP trust and the trust fund comprises an insurance policy. We may terminate this trial at any time or decide not to give a trial, for any reason. Assume Ginas free estate simply comprised cash in the bank of 90,000, Assume the house that Gina lived in under the IIP trust was valued at 2,500,000, Step 3 there will be a double NRB but no RNRB as the house is not passing to direct descendants. In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. In valuing the trust property the related property rules will apply. Basic rate taxpayers will have to pay basic rate on mandated income but otherwise the tax paid by the trustees will satisfy their liability. 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. 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. 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). Gifts into these trusts were potentially exempt transfers (PETs) rather than CLTs. This type of IIP is known as an immediate post death interest or IPDI. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. 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. 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. For trustee investment purposes, OEICs are often preferred to bonds for IIP trusts, but bonds may also be suitable depending on the circumstances. by taking up to the 5% tax deferred withdrawal allowance) as all payments from a bond are capital in nature. a new-style life interest, i.e. Typically, the surviving spouse is given the right to trust income for their lifetime (or the right to occupy the marital home) with the capital passing on death to designated children. 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. 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. 22 March 2006 is a key date regarding the taxation of IIP Trusts. 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. Sign-in Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. 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. 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?