These have the same IHT treatment as discretionary trusts. Only the additional gift will be in the new regime and not the whole trust fund. IIP trusts are quite common in wills. These cookies enable core website functionality, and can only be disabled by changing your browser preferences. The subsequent death of the former Life Tenant within 7 years of the termination could give rise to a further Inheritance Tax charge. 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. This allows the trustees to invest in life policies, such as investment bonds. 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. Remember that personal allowances are available to individuals only and not to trustees. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. While the life tenant is alive, the trust is treated as an interest in possession trust. 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. 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. In this case, there will be ongoing tax consequences, particularly for Inheritance Tax. 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. 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 income beneficiary of a qualifying IIP trust is treated for IHT purposes as beneficially entitled to the underlying capital i.e. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. Where there is more than one settlor, each will be assessed proportionately on any bond gain based on their contribution to the trust. Human Trafficking & Modern Slavery Statement. The relevant legislation is S49(1A) and S58(1) IHTA 1984. It is not to be treated as a substitute for getting full and specific advice from Wards. These are known as 'flexible' or 'power of appointment' trusts. IHTM16121 - Reverter to settlor: on death of life tenant There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. 2023 Croner-i is authorised and regulated by the Financial Conduct Authority in respect of Insurance Mediation Services, Financial Services Register no. 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. 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. This element requires third party cookies to be enabled. If these conditions are satisfied then it is classed as an immediate post death interest. This can make the tax position complex and is normally best avoided. Importantly, trustees cannot accumulate income. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). 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. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. The trustees are a separate entity for Capital Gains Tax purposes and are liable to pay tax on any gains they make over and above the trusts annual allowance. Each policy year, for a maximum of 20 years, 5% of the original investment (including any increments) in a bond can be withdrawn without triggering any immediate income tax liability. However, as mentioned above, the life tenant will have no control over where the trust assets will pass after . Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. 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. it is in the persons IHT estate. Kia also has experience of working in industry. This site is protected by reCAPTCHA. What else? The Trustees do not qualify for a dividend allowance or savings allowance. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. For example, include: However, if income bypasses the trustees and the trust: then the settlor includes the income on his or her personal return. They can do so, by terminating part of Sallys cousins interest and appointing Sally a new life interest in that part of the trust fund. We may terminate this trial at any time or decide not to give a trial, for any reason. This means that on Peter's death, the assets of the trust will pass automatically to his daughter. Please share this article with your clients. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates. 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 Example of IIP beneficiary being a minor child of the settlor. This is a bit niche! Change your settings. The value of tax reliefs to the investor depends on their financial circumstances. 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. This will both save the deceased's family time and help to avoid the estate tax. 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. A step child includes the child of a civil partner. The life tenant only has an automatic entitlement to trust income and not capital. 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. The Google Privacy Policy and Terms of Service apply. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. 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). Such trusts will often end when the beneficiary leaves the property for whatever reason, or remarries. Note that the death uplift for CGT purposes would apply to an IIP in an IPDI. 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. allowable letting expenses in a property business). In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. The husbands Will would create a Life Interest Trust or Right of Occupation for his wife, so that she can live in the property for as long as she needs. Special rules also exist where a parent sets up a trust for their minor (under 18) unmarried 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. Whilst the life tenant of a FLIT is alive, the property is . However . 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. Where the settlements legislation applies, the income is treated as that of the settlor and there will be no charge on the actual beneficiary. Qualifying interest in possession trustsIHT treatment The spousal exemption will apply to these funds passing on Kirsteens death. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. In the past, IIP trusts were subject to estate duty when the beneficiary died. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. 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. Where the liability falls on the trustees, the trust rate applies. The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. It will not become subject to the relevant property regime. An IIP trust can be created on death either by the terms of the deceased's Will, the laws of intestacy or a deed of variation. Basic rate taxpayers will have to pay basic rate on mandated income but otherwise the tax paid by the trustees will satisfy their liability. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. For the avoidance of doubt, if the trustees have discretion or power to withhold the income from the income beneficiary, which can be exercised after income arises, then there cannot be an IIP. 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. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. The trusts were not subject to the relevant property regime of periodic and exit charges. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. 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. 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. 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.). 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)? Clearly therefore, it is not always necessary for the trust property to produce income.
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