Flexible Life Interest Trusts and the Residential Nil Rate Band However, an election can be made to defer the CGT liability by claiming hold-over relief, regardless of the nature of the assets being distributed, provided that the beneficiary is becoming absolutely entitled to the trust assets without previously having been entitled to an IIP. Instead, a revaluation will occur, the trustees or new owner will be treated as acquiring the assets at the uplifted market value and any gain held over on the creation of the . To control which cookies are set, click Settings. You can learn more detailed information in our Privacy Policy. We do not accept service of court proceedings or other documents by email. The circumstances may not always be so straightforward. The settlor of a settlor interested IIP gets no relief for TMEs. However, trustees will not be able to deduct any expenses from mandated income. Tom has been the life tenant of the Tiptop family trust for more than 10 years. Would a revocable appointment of a real property out of a life interest trust to an individual (absolutely) pre-2006 have created an interest in possession for the appointee? Understanding interest in possession trusts. These may be subject to change in the future. Life estate - Wikipedia Therefore, if the IIP terminates or the beneficiary disposes of his/her IIP then a PET arises if the property passes to another individual absolutely. Where there are multiple IIP beneficiaries, the change of one beneficiary will bring only that portion into the relevant property regime. Provided the relevant conditions are met it may be possible for the person making the disposal to claim hold-over relief. 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. Trustees Management Expenses (TMEs) are however different. Residence nil rate band - abrdn We accept no responsibility for the content of these websites, nor do we guarantee their availability. For tax purposes, the Life Tenant has an Interest in Possession. The trust itself will also be subject to periodic and exit charges. These are known as 'flexible' or 'power of appointment' trusts. 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). The leading case for the definition of an IIP is the House of Lords case of Pearson v IRC [1981] AC 753. The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. PDF RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK) - Association of Chartered The relief can also be claimed if the gift is of business assets. allowable letting expenses in a property business). International Sales(Includes Middle East), Death of the beneficiary with the qualifying interest in possession, Calculation of inheritance tax on death of life tenant, Ending of an interest in possession during beneficiary's lifetime, Circumstances when IHT not chargeable on termination of a QIIP, Circumstances when termination of a QIIP treated as a PET, Circumstances where termination of a QIIP immediately chargeable to IHT, Reservation of benefit in a QIIPapplication of the GWR rules, Calculation of IHT on lifetime termination of QIIP, Special rate of charge where termination is affected by a previous PET. There are special rules for life policy trusts set out later. HS294 Trusts and Capital Gains Tax (2020) - GOV.UK Interest in Possession (IIP) when a beneficiary has a present right of present enjoyment in the net income of the Trust property without any further decision of the trustees being required. Clients who exercise an option to increase payments into existing life insurance policies from 22 March 2006 will not create fresh relevant property trusts. This meant that there was never an immediate charge to IHT whatever the value of the gift, but there could retrospectively be a charge should the settlor die within seven years of making the gift. For tax purposes, the inter-spouse exemption applied on Ivans death. This can be done without incurring any inheritance tax charge because the assets remain in the relevant property regime throughout. A list of LLP members is displayed at our registered office: 52 Broad Street, Bristol BS1 2EP. Amanda Edwards TEP is a Solicitor with Boodle Hatfield. This regime is explored here. These cookies enable core website functionality, and can only be disabled by changing your browser preferences. Tax rates and reliefs may be altered. The new beneficiary will have a TSI. The settlor will be taxed in the same way as an individual. These beneficiaries are referred to as the remaindermen. Prior to the reform of CGT in 2008, capital gains arising to settlor interested trusts were charged on the settlor rather than the trustees. 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. Tax is then payable by the beneficiary when he or she finally disposes of the asset, and the acquisition cost is reduced by the amount of the held-over gain. The trust does not fall into the taxable estate of any beneficiary and beneficiaries can be varied without IHT consequence. Trusts created by a Will - Coman and Co On 1 October 2008 he terminated that interest in favour of his daughter Harriet (the current interest). Back to Basics - Flexible Life Interest Trust (FLIT) If however the income beneficiarys interest comes to an end on or after 22 March 2006 and the property remains in trust, then the outgoing beneficiary is treated as making a Chargeable Lifetime Transfer (CLT) based on the trust fund value at that time, and the trust will become subject to the relevant property regime. What Is a Life Estate? - Investopedia Even so, the distribution remains income for tax purposes. S8K IHTA 1984 defines a direct descendant as the deceased persons child, grandchild or other lineal descendant, a husband, wife or civil partner of a lineal descendant (including their widow, widower or surviving civil partner), a child who is, or was at any time, their step-child, their adopted child, a child who was fostered at any time by them, a child where theyre appointed as a guardian or special guardian when the child is under 18. Therefore they are not taxed according to the relevant property regime, i.e. If however the stocks and shares have been mixed, then an apportionment will be required. Immediate post-death interest (IPDI) | Practical Law The maximum rate of IHT for these charges will be 6% but in practice is often zero if the value of the trust remains below the available nil rate band. Beneficiaries can use their personal allowance, savings rate band, personal savings allowance and dividend allowance where available against trust income. The IHT liability is split between Ginas free estate and the IIP trustees as follows. This does not include nephews, nieces, siblings, and other relatives. The income beneficiary is often referred to as having a life interest (life rent in Scotland) or being the life tenant (life renter). Qualifying interest in possession trustsIHT treatment 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) It can be tried in either the magistrates court or the Crown Court. 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. From April 2016, Capital Gains Tax rates vary depending on the nature of the asset disposed of. Such transfers are not regarded as chargeable lifetime transfers for IHT, and consequently holdover relief won't apply unless the transfer is of business assets. This is still the position for IIP trusts which retain that IIP status. 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. 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. TQOTW: Interest In Possession & Resident Nil-Rate Band The tax paid remains the same but there is a time and costs saving for the trustees (and HMRC). The term IIP is not defined in tax legislation. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom. In that case, Clara is not making a post 2006 disposal and therefore none of the trust fund becomes relevant property. The image of scales suggests a weighing of known quantities whereas investment decisions are concerned with predictions of the future. This could be in favour of Sallys cousin, who will have a revocable life interest. Trust income paid directly to the beneficiary will be taxed at their rates. If that IIP terminates during the beneficiarys lifetime then tax is charged as if the beneficiary had made a transfer of value. It would generally be simpler to make further gifts to a new trust. 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. All rights reserved. Registered number: 2632423. Only the additional gift will be in the new regime and not the whole trust fund. 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? Where an individual becomes absolutely entitled to trust property during his or her Lifetime, the trustees will be treated as making a chargeable disposal for CGT. 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. Registered Office: Artillery House, 11-19 Artillery Row, London SW1P 1RT, United Kingdom. However the tax treatment of the trust is very similar to that of a full Life Interest Trust. 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. Any further gifts made to an interest in possession trust that was in force prior to 22 March 2006 will be treated as relevant property. Note that Table 1 refers to an 'accumulation and maintenance trust'. In contrast, interest in possession (IIP) or life interest trusts give beneficiaries an absolute entitlement to the income of the trust. 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. Click here for a full list of third-party plugins used on this site. The value of the trust formed part of the estate of the IIP beneficiary. Human Trafficking & Modern Slavery Statement. 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. Example of a post 5 October 2008 death of spouse giving rise to a TSI. The relevant property regime did not apply meaning that there were no entry, exit, or periodic charges. It grants the life tenant ownership of property without having to include it in the will as part of their assets. Equally, it would be unfair to the remaindermen if the trustees were to make investments which offered a high income but little or no capital growth, or which led to the value of the capital being eroded. The legislation for this is S624 ITTOIA 2005. Indeed, an IIP frequently exist in assets that do not produce income. From 22 March 2006 there are only three types of new IIP qualifying trusts an Immediate Post Death Interest, a Disabled Persons Interest, or a Transitional Serial Interest. Can the conditional exemption for heritage property apply when those assets leave a relevant property trust and would otherwise suffer a proportionate charge? Even if the trustees have a power of appointment, and can terminate the original life tenants interest if they so desire, they will be outside the scope of the relevant property regime. Income tax anti-avoidance measures treat the trust income as that of the settlor if they and/or their spouse/civil partner can benefit from the trust.