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. . Harry has been life tenant of a trust since 2005. The following Private Client practice note produced in partnership with Paul Davies of Clarke Wilmott LLP provides comprehensive and up to date legal information covering: Trust property, which is the subject of a qualifying interest in possession (QIIP), may become chargeable to inheritance tax (IHT) on the following occasions: on the death of the beneficiary with the interest in possession (the life tenant), on the death of the beneficiary (life tenant) within seven years after a transfer or lifetime termination of their interest, on the transfer or conversion of the interest to a non-qualifying or discretionary interest. abrdn plc is registered in Scotland (SC286832) at 1 George Street, Edinburgh, EH2 2LL. Does it make any difference how many years after the first trust that the second trust is settled? Free trials are only available to individuals based in the UK. The magistrates court may decline jurisdiction where for example in cases involving a weapon/throwing objects, or conduct that causes serious, Qualifying interest in possession trustsIHT treatment, Art and heritage property, landed estates and farming families, Family businesses and ownership structures, Pensions, insurance and tax efficient investments, Tax avoidance, evasion and non-compliance, Taxation of trustsincome tax and capital gains tax, Draft Finance Bill 2016the residence nil rate band, High Courts rectification of deeds decision consistent with other recent decisions (A and others v D and others), No rewriting historythe flexibility of Jerseys remedies for mistake and inadequate deliberation (Representation of The Grundy Trust), Wealth Tax Commissiona wealth tax for the UK final report. We use cookies to optimise site functionality and give you the best possible experience. The technology to maintain this privacy management relies on cookie identifiers. 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. We use the word partner to refer to a member of the LLP or an employee or consultant with equivalent standing. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. For lifetime trusts the main issue is whether the trust was created before or after 22 March 2006. The 100 annual limit is per parent and per child. 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. Providing your spouse occupies the trust property as their residence, then the RNRBs mentioned above should be available. "Prudential" is a trading name of Prudential Distribution Limited. See later section on this subject, The IIP beneficiary is taxable on the trust income because he or she is entitled to it. Clicking the Accept All button means you are accepting analytics and third-party cookies (check the full list). In essence this is an administrative shortcut. Either a premium was paid on or after 22 March 2006 or an allowed variation is made to the contract on or after that day. This is a right to live in a property, sometimes for life, but more often for a shorter period. The beneficiary both receives the income and is entitled to it. 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). She is AAT and ATT qualified and is currently studying ACCA. Some cookies are essential, whilst others help us improve your experience by providing insights into how the site is being used. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. The exception might be if the settlor made it clear that one class of beneficiary was to be preferred over another. 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. 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. More than that though, the image of the scales suggests a mechanical approach when in fact the trustees have discretion. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. 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 contrast bonds are non-income producing investments and withdrawals are a return of capital not income. The legislation for this is S624 ITTOIA 2005. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. 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. The Trustees do not qualify for a dividend allowance or savings allowance. 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. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. The trustees have the power to pay income and often capital to the life tenant. 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. A settlor has retained an interest if the IIP beneficiary is the settlor, a spouse or civil partner. The implications of this are outlined below. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. 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. Example of IIP beneficiary being a minor child of the settlor. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? She has a TSI. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. Moor Place? 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. This would be a chargeable lifetime transfer, and they should notify the trustees who may need to account for any IHT. 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. Note that a Capital Redemption policy is not a life insurance policy. 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. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. This will also be an immediately chargeable transfer and Janes income interest will be in the relevant property regime (contrast this with the termination of Toms interest in favour of Jane on death, which would be spouse exempt, with Jane taking a TSI). 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. Taxation of the Assets held in the IPDI Trust. 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. The trustees are initially be taxed on the trust income because they receive it (though see later section on mandating income to the beneficiary). These may be subject to change in the future. Where a number of trusts have been created since 6 June 1978 by the same settlor, the trustees exemption is divided equally between them, subject to a minimum exemption of one fifth of the available amount. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. Kirsteen who is married to Lionel has three children from a previous relationship. 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. Accordingly, OEICs are often preferred to bonds for trustees of IIP trusts where one or more beneficiaries are entitled to income. Click here for the customer website. 22 March 2006 is a key date regarding the taxation of IIP Trusts. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. This was a particular type of discretionary trust, which had advantages for inheritance tax purposes. 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? 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. The trustees should generally avoid paying bond withdrawals to a beneficiary who only has the right to receive income, as they are capital payments. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. This could be in favour of Sallys cousin, who will have a revocable life interest.

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