What is an Interest in Possession trust?
An Interest in Possession trust is a trust where a beneficiary has an absolute right to the income of the trust. They are often referred to as ‘life tenants’ and this type of trust is often referred to as a life interest trust.
Even though the income is paid to the Trustee then they must pass all of that income to the beneficiary, net of any trust expenses.
As well as having a life tenant the trust will also have at least one remainderman’. This beneficiary will be entitled to the capital of the trust once the interest in possession (life interest) comes to an end.
It is the Trustees who are responsible for settling the trusts income tax liabilities for the year and completing the Trust & Estate Tax Return each relevant tax year. The relevant filing dates etc are the same as individuals under the Self-Assessment system.
The tax rates are also the same as for individuals. As with individuals, these rates differ depending on the type of income.
An Interest in Possession trust is not subject to the special Rate Applicable to Tax like a Discretionary Trust is.
Special tax rules apply to interest in possession trusts with beneficiaries who are disabled or who are children who have lost a parent through death. (see below.)
It should be noted that the Trustees should consider whether the trust needs to be registered with HMRC’s online registration system.
Further details on the trust income tax can be found here.
At the basic level, Capital Gains Tax is due on chargeable assets which are disposed of at a profit.
The Trustees, again, will be liable to Capital Gains Tax on any chargeable gains above annual exemption.
The beneficiaries do not suffer any tax on these capital gains and, equally, do not get a tax credit for the tax paid by the trustees.
Further details on trust capital gains can be found here.
There may be an Inheritance Tax charge on the following occasions:
- where assets – money or property – are put into an interest in possession trust and the value exceeds the nil rate band (£325k) of the Settlor
- On the tenth anniversary of the creation of the trust (subject to the value of the assets)
- Where there is a distribution of assets from the trust
If you have any queries around Interest in Possession trusts, or the use of trusts in general, then please get in touch.