No chargeable gain for CGT will arise on the termination of a life interest as a result of the death of a life tenant with a pre-22 March 2006 interest in possession. Linda is treated as beneficially entitled to it and IHT charged as though Linda owned it. You can learn more detailed information in our Privacy Policy. Tom has been the life tenant of the Tiptop family trust for more than 10 years. This Fact Sheet has been prepared to provide you with basic information. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. If the Life Tenants interest is brought to an end during their lifetime but the trust assets remain held on discretionary trusts, the Life Tenant will be deemed to have made an immediately chargeable transfer for Inheritance Tax and the trust will pay tax at a rate of 20% on the value of trust assets exceeding the Nil Rate Band (currently 325,000 in 2021-22). If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. Note that the scope of S46A is not restricted to premiums paid that the individual was contractually bound to make before 22 March 2006. The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. 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. 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. This can make the tax position complex and is normally best avoided. 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). Privacy notice | Disclaimer | Terms of use. S8H (2) IHTA 1984 defines a 'qualifying residential interest' as an interest in a dwelling-house which has been that person's residence at some time in their ownership. Top-slicing relief is not available for trustees. Indeed, an IIP frequently exist in assets that do not produce income. Interest In Possession & Resident Nil-Rate Band. Whilst the life tenant of a FLIT is alive, the property is . 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. Replacing the IIP beneficiary with an absolute interest. 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. Disposals by trustees will be subject to CGT at the trust rate with an annual exemption of up to half the individual allowance. The annual allowance for trustees is half of that of an individual currently (2021-22) 12,300 (6,150 for trusts). Gordon has had a life interest (the prior interest) under an IIP trust since 1 July 2000. However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. Also bear in mind that the rates below will apply to the trustees regardless of the level of income and therefore tax bands do not apply. 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 person with the IIP has an earlier interest. 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. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. 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. Your choice regarding cookies on this site, Gifting the family home? an income interest in possession within the relevant property regime in Chapter III IHTA 1984. IIP trusts will need to be entered on the HMRC trust register if they have income that is not mandated directly to the life tenant, or capital gains from disposals. Please share this article with your clients. e.g. If these conditions are satisfied then it is classed as an immediate post death interest. 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. They are often referred to as 'life tenants' and this type of trust is often referred to as a life interest trust. 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 content displayed here is subject to our disclaimer. Investment bonds should not be used to provide an income to a life tenant (e.g. The trustees may be able to jointly elect with the relevant beneficiary for gains to be held over if the asset is either a 'qualifying business asset' or the trust 'qualifies' (mainly lifetime IIP trusts created after 21 March 2006). 951415. If the trust comes to an end on the death of the Life Tenant, again the capital value of the trust will be aggregated with the Life Tenants estate to calculate Inheritance Tax due. Remember that personal allowances are available to individuals only and not to trustees. This could be in favour of Sallys cousin, who will have a revocable life interest. In the above example, Kirsteen and Lionel were married, but for the avoidance of doubt, an IPDI does not have to be in favour of a surviving spouse or civil partner. 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. In other words, there was a window between 22 March 2006 and 5 October 2008 when a beneficiary of an IIP trust could pass on that interest to others such as children. The income beneficiary has a life interest or life rent. Sign-in
Google Analytics cookies help us to understand your experience of the website and do not store any personal data. In other words, the trust fund fell inside that persons estate for IHT purposes (S49(1) IHTA 1984). What is the CGT treatment of an interest in possession trust? However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. Petes interest will be an income interest within the relevant property regime, in favour of a life interest for Toms wife, Jane. Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. Sally is the life tenant of a trust of GBP3 million, created in 2007, so her life interest is within the relevant property regime. Beneficiaries who are taxed at less than basic rate can reclaim any tax paid by the trustees. CGT may be payable on the transfer of assets into or out of IIP trusts, but it may be possible to defer CGT in some circumstances. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. For example, they can take into account the income needs of the life tenant or the fact that the tenant was a person known to the settlor and a primary object of the trust whereas the remainderman might be a remoter relative. There are a couple of exemptions that exist for life assurance policies that were held by the trust prior to 22 March 2006. allowable letting expenses in a property business). In 2009 the trustees are considering various possibilities for terminating his interest in favour of Toms son, Pete, absolutely. A life interest Will trust (also known an interest in possession trust) will need to be registered with HMRC, even where the life tenant receives all income, including it on their own tax return. 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. As such, the property doesn't go through the probate process. 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. As a result, S46A IHTA 1984 was introduced. 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. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. 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. The settlor will be taxed in the same way as an individual. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. 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. a trust), the income arising is treated as the settlors income for all tax purposes. CONTINUE READING
on death or if they have reached a specific age set out in the trust deed etc. This regime is explored here. 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, any gains up to death are wiped out and the acquisition cost is reset to the asset value at death. 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. 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. 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. This is because the trust is subject to IHT in their estate. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. Instead, a single premium policy with the ability for the individual to make further premium payments (increments) would also be covered meaning that those premiums can continue to enjoy PET treatment. Generally, no IHT periodic and exit charges for IIP trusts created on death or before 22 March 2006. The trustees will acquire assets at their market value at the date of death. She remains the current life tenant of the trust. It is likely they will also have wide investment powers, but these must be used in the best interests of the beneficiaries. There are no capital gains tax consequences for lifetime gifts involving cash or existing bonds. the life tenant of an IIP trust created in 1995. FLITs for IHT purposes are a mixture between an interest in possession and a relevant property trust.