Gordon made a PET on 1 October 2008 subject to the 7 year rule. 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. Registered number SC212640. Therefore, providing that changes in the holders of the IIP take place on death then these provisions allow all subsequent holders to be treated under the pre 22 March 2006 rules. If however the stocks and shares have been mixed, then an apportionment will be required. What if the facts had been similar but instead of two properties, the trust contained a number of stocks and shares to which more had been added. Click here for a full list of third-party plugins used on this site. Life Estate: A type of estate that only lasts for the lifetime of the beneficiary. The relief can also be claimed if the gift is of business assets. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom EH2 2LL. 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. Qualifying interest in possession Qualifying interest in possession (IIP) trusts are treated, for inheritance tax purposes, as though the assets belonged to the life tenant (see Practice note, Taxation of UK trusts: overview: Qualifying IIP trusts ). 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. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. Consequently there was no CGT liability but the trustees were regarded as making a disposal of the trust assets at the then market value and the assets were deemed to have been acquired at their new base cost. 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. Wards Solicitors is a trading name of Wards Solicitors LLP which is a limited liability partnership registered in England and Wales (registered number OC417965) and authorised and regulated by the Solicitors Regulation Authority under number 646117. 22 March 2006 is a key date regarding the taxation of IIP Trusts. The surviving spouse would be the 'life tenant' and the children would be the 'remaindermen'. This allows the trustees to invest in life policies, such as investment bonds. The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime. 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. Therefore they are not taxed according to the relevant property regime, i.e. HS294 Trusts and Capital Gains Tax (2020) - GOV.UK 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 house will now pass to the nephews and nieces of her 2nd husband under the terms of his will trust. These beneficiaries are referred to as the remaindermen. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. 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. Inheritance tax on trusts - Trust the taxman | Accountancy Daily The RNRB applies when a qualifying residential property interest is inherited by a direct descendant. Moor Place Lodge? The legislation for this is S624 ITTOIA 2005. a trust), the income arising is treated as the settlors income for all tax purposes. When a chargeable event occurs any gain will be assessed to income tax on: * The liability remains with the settlor throughout the tax year of their death. a new-style life interest, i.e. The trusts were not subject to the relevant property regime of periodic and exit charges. 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. 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. 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. At least one beneficiary will be entitled to all the trust income. 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. It grants the life tenant ownership of property without having to include it in the will as part of their assets. In 2008 Stephen added Moor Place Lodge to the same trust and instructed the trustees to administer the two properties as separate funds. We may terminate this trial at any time or decide not to give a trial, for any reason. 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. Example of Pre 22 March 2006 IIP replaced prior to 6 October 2008 giving rise to a TS. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. as though they are discretionary trusts. Google Analytics cookies help us to understand your experience of the website and do not store any personal data. Residence nil rate band - abrdn The right to income could also be satisfied by allowing the life tenant to benefit from the trust property without actually owning it. An Interest in Possession Trust can also arise where a beneficiary is left a Right of Occupation. 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. A flexible IIP trust offered by an insurance company therefore allowed the settlor to choose named individuals (i.e. The Google Privacy Policy and Terms of Service apply. Setting the scene | Tax Adviser The wife would be the Life Tenant of the Trust, entitled to receive a benefit from the Trust for the whole of her lifetime. The relief can be tapered or reduced to nothing depending on the size of your own and your spouses estate. Allowable TMEs will reduce the beneficiarys entitlement to income rather than being used to reducing the trustees tax liability. TSI (1) The transitional period to 5 October 2008 (S49C IHTA 1984), TSI (2) Surviving spouse or civil partner trusts (S49D IHTA 1984), TSI (3) Life insurance trusts (S49E IHTA 1984). 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. Please share this article with your clients. 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. There are certain limited circumstances where an Interest in Possession Trust can be created outside of a Will but these are not considered here. Whilst the life tenant of a FLIT is alive, the property is . Trusts for vulnerable beneficiaries are explored here. There is a chargeable transfer by the deceased unless the IIP is for the spouse or civil partner in which case it is an exempt transfer. Insurance company bonds were a common asset held within the trust due to the fact they do not produce income. Interest in Possession Trust | ETC Tax | Expert Tax Advice The beneficiary should use SA107 Trusts etc. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). For tax purposes, the Life Tenant has an Interest in Possession. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh,EH2 2LL. 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. The trustees are initially be taxed on the trust income because they receive it (though see later section on mandating income to the beneficiary). Ivan had a life interest (a previous interest) under an IIP trust from 1 August 2001. Gina has recently passed away. For example, it may allow them to live rent free in a residential property owned by the trust. Any links to websites, other than those belonging to the abrdn group, are provided for general information purposes only. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. They will normally need to strike a balance between a reasonable yield for the life tenant whilst giving the opportunity for capital growth for the remaindermen. Indeed, an IIP frequently exist in assets that do not produce income. They will typically use R185, Different rules apply where the income of the IIP beneficiary is treated as that of the settlor under the settlements legislation. It would generally be simpler to make further gifts to a new trust. This Fact Sheet has been prepared to provide you with basic information. an income interest in possession within the relevant property regime in Chapter III IHTA 1984. 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