Will payments be treated as 'same-day additions' under IHTA 1984, s 62A, for the purpose of calculating ongoing IHT charges on pilot trusts, where an employee is a member of a contractual contributory pension scheme and that employee has requested that the administrators divide funds to several pilot trusts set up by that employee on different days during his lifetime so that the total funds in each pilot trust remains under the IHT nil rate band? All transfers into IIP trusts on or after 22 March 2006 are treated as chargeable transfers and are taxed in the same way as relevant property trusts. As a result, S46A IHTA 1984 was introduced. Gifts to flexible trusts were potentially exempt transfers (PETs) and the trust was not subject to periodic or exit charges. In other words, for IIPs arising after 21 March 2006, other than the categories of TSIs described above, the income beneficiary will only have the trust fund inside their estate where the interest is. Thus, from a CGT perspective, there is no uplift to market value on the death of the life tenant of a new IIP trust. The trade-off for this tax treatment was that the income beneficiary was treated as beneficially entitled to the underlying capital. Flexible Life Interest Trust A Life Interest Trust where the trustees are given powers to advance capital from the trust to beneficiaries, including the Life Tenant, during their lifetime. Prior to 22 March 2006 the value of trust assets was re-based for CGT purposes on the death of the beneficiary of an IIP trust. Assume that the trustees opted to give Sallys cousin a revocable life interest. 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. Clearly therefore, it is not always necessary for the trust property to produce income. This remains the case provided there is no change to the IIP beneficiary. However, new trusts are now subject to the same IHT regime as discretionary trusts and their use has declined. The trust is treated as pre 22 March 2006 and is not subject to the relevant property regime. Remainderman the beneficiary who will receive trust assets after the Life Tenant has died. The new beneficiary will have a TSI. Section 46A provides protection to not only the IIP that originally existed before 22 March 2006 but also extends to any TSI. The tax is grossed-up if it is paid by the settlor which makes the effective rate 25%. Gifts into these trusts were potentially exempt transfers (PETs) rather than CLTs. This can make the tax position complex and is normally best avoided. In correspondence with The Chartered Institute of Taxation, HMRC stated: The beneficiary should return all income on the relevant pages of their tax return, in addition to their direct personal income. Interest in possession (IIP) trusts give a named beneficiary (or beneficiaries) the right to any trust income. The trustees will not have to supply all the income details onSA900and may even request to be taken out of the Self-Assessment regime for future years. The RNRB applies when a qualifying residential property interest is inherited by a direct descendant. Currently, dividend income (from shares) will be taxed at 7.5% while all other income is taxed at 20%. However, this exemption is shared equally between all trusts created by the same settlor, subject to a minimum of one fifth of the trust exemption. 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. This re-basing facility ceased for most IIP trusts created on or after 22 March 2006 and consequently, as from that date, the death of a beneficiary will not give rise to any CGT re-basing. If these conditions are satisfied then it is classed as an immediate post death interest. We do not accept service of court proceedings or other documents by email. Replacing the IIP beneficiary with a new IIP beneficiary on or after 6 October 2008 will be a chargeable lifetime transfer (and may therefore incur a lifetime charge of 20% depending on the value) from the beneficiary that has been replaced. 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. The settlor has the right to reclaim any tax they suffer from the trustees, and while they have this right it will be included in their estate for IHT. Lifetime trusts created after 21 March 2006, Lifetime trusts created before 22 March 2006. In 2017 HMRC set up the Trust Registration Service. Do I really need a solicitor for probate? However, if you are not using your RNRB, it may be claimed as a transferrable RNRB in your spouses estate. Harry has been life tenant of a trust since 2005. 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. HMRC will effectively treat the addition as a new settlement. 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. FLITs are essentially a life interest for a person (usually the surviving spouse), with an underlying discretionary trust that will arise when the surviving spouse dies. a new-style life interest, i.e. If that person died on or after 6 October 2008 but before the life insured then a new beneficiary can acquire a present interest. It should be remembered that dividends and interest are now paid gross with no tax credits available to meet the liability. This field is for validation purposes and should be left unchanged. This abolished the remaining 50% being enjoyed as a life interest which had applied from the 1920s. This can be advantageous as the beneficiary has the full annual exemption and may pay a lower rate of CGT. If you require further information, please contactMary Hartyon0117 9292811or by e-mail atmary.harty@wards.uk.com. This would be a chargeable lifetime transfer, and they should notify the trustees who may need to account for any IHT. For tax purposes, the inter-spouse exemption applied on Ivans death. as though they are discretionary trusts. 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. There will be a CGT disposal if the trustees transfer chargeable assets to a beneficiary. But unlike a trust with a life tenant, they do not have to provide an income for these beneficiaries. Someone who holds an IIP in property that was settled before 22 March 2006 is treated as if they owned the settled property, but, Someone who holds an IIP in property settled on or after 22 March 2006 is not generally treated as owning it; and that property will typically fall under the relevant property regime, Interest received from Open Ended Investment Companies (OEICs) or from banks/building societies, is received gross and taxable on the trustees at 20%, Rental profits after allowable expenses are also taxed at 20%, Trustees receive gross interest of 1,000 on which they pay tax at 20% of 200, The beneficiary receives 800 from the trustees, The beneficiary is entitled to the gross amount 1,000, and is taxable on that amount, The beneficiary is given credit for the 200 tax paid by the trustees, If the beneficiary is a higher rate taxpayer further tax will be payable, If the beneficiary is a non- taxpayer then a repayment claim will be possible, is not settlor interested but the trust income passes directly to the settlors relevant minor child. This means that the crystallisation of capital gains can be deferred until the asset transferred is realised by the trustees (or following a further holdover claim realised by a beneficiary). Instead, the value of the trust will form part of the life tenant's taxable estate on their death. 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. Whilst the life tenant of a FLIT is alive, the property is . There is greater flexibility in the regime for the trustees to vary interests in income without incurring any tax charge, as such interests are not within the charge on termination by virtue of section 52(2A). 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. This Fact Sheet has been prepared to provide you with basic information. This could be in favour of Sallys cousin, who will have a revocable life interest. The end result will be, In 2003 Stephen gifted Moor Place into an IIP trust for Linda. The trustees exclude the mandated income from the trust and estate tax return and the beneficiary (or, where the settlor has retained an interest, the settlor) includes the income on his/her tax return. Trust income paid directly to the beneficiary will be taxed at their rates. Where the settlor has retained an interest in property in a settlement (i.e. Example of IHT arising on death of the income beneficiary. 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. Income received by the Trust should strictly be declared by the Trustees. You will not appear to benefit from the residence nil-rate band (RNRB) as the interest is not going to direct descendants, but initially into trust for your spouse. Multiple trusts - same day additions, related settlements and Rysaffe planning. 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. The beneficiary should use SA107 Trusts etc. Any investments owned by the trustees should be carefully managed to reduce this tax burden. For non-life policy trust situations, it is possible that the trust fund comprises gifts both before and after 22 March 2006. With regard to the existing life interest, the crucial factor is whether it is: 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 tenants inheritance tax estate and is a transfer of value (section 52). 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. The life tenant has a life interest and remainderman is the capital . If the trustees choose to mandate the income directly to the beneficiary they will not need to report it on the trust tax return, which reduces their administrative costs. on the death of a life tenant of an 'old' interest in possession trust the trust property must be included in the deceased life tenant's death estate. She has a TSI. This beneficiary is often referred to as the life tenant of the trust (or life renter in Scotland). 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. CONTINUE READING The income, when distributed to them, retains its source nature, for example, dividend or interest. Signatureless process for onshore bonds content, Heritage servicing and new business tracking, Interest in Possession (IIP) Trusts Taxation, What you need to know about Interest in Possession trusts, Lifetime gifts into IIP trusts prior to 22 March 2006, TSI (1) The transitional period to 5 October 2008, TSI (2) Surviving spouse or civil partner trusts, Adding property to a pre 22 March 2006 trust, Adding value to a pre 22 March 2006 trust, important information about trusts document.
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