An Interest in Possession Trust (IIP Trust) in the UK is a type of trust where at least one beneficiary (known as the life tenant) has the legal right to receive the income generated by the trust assets during their lifetime, or to use the trust property. This right exists even though they don’t own the underlying assets, which remain held in the trust for the benefit of other beneficiaries.
Key Features
- Life Tenant’s Interest:
- The life tenant (or income beneficiary) is entitled to income from the trust or use of its assets, such as living in a property held by the trust.
- This right usually lasts for the life tenant’s lifetime or a specified period.
- Remainder Beneficiaries:
- When the life tenant’s interest ends (e.g., upon their death), the remaining trust assets (the “capital”) are passed to other beneficiaries, known as remainder beneficiaries.
- Trustees’ Role:
- Trustees manage the trust assets and ensure that the life tenant’s interest is maintained while preserving the capital for the remainder beneficiaries.
- Types of Assets:
- Assets in an IIP Trust can include property, investments, or cash.
Tax Implications
The tax treatment of IIP Trusts varies depending on when the trust was created and its circumstances:
1. Inheritance Tax (IHT):
- Pre-22 March 2006: IIP Trusts created before this date are often treated as if the life tenant owns the assets directly. When the life tenant dies, the trust assets are included in their estate for IHT purposes.
- Post-22 March 2006: Most new IIP Trusts fall under the “relevant property regime,” subject to periodic charges (10-year charges) and exit charges.
2. Income Tax:
- Income received by the life tenant is taxable at their personal tax rate. Trustees usually pay income tax on the trust’s income and pass it to the life tenant with a tax credit.
3. Capital Gains Tax (CGT):
- Trustees are responsible for CGT when selling trust assets, although there are some exemptions or rollover reliefs depending on the situation.
Common Uses
- Providing for a spouse/partner: For example, a settlor might create an IIP Trust to allow their spouse to benefit from the income during their lifetime, with the capital passing to their children afterward.
- Asset protection: Helps to ensure that trust assets are preserved for future beneficiaries.
- Estate planning: Can help structure inheritance and mitigate tax liabilities effectively.
If you would like to open a trustee bank account on the Monika platform, contact us, and we will be happy to assist.
