Understanding Interest in Possession Trusts
Up to 60 CPD minutes
Introduction
An interest in possession (IIP) trust gives a named beneficiary a right to the income from the trust but not to the trust capital. This can offer a useful way of providing a specific beneficiary with an income with the trust capital ultimately passing to different beneficiaries at some future point.
Advisers need to understand who is entitled to the income and capital of the trust, the tax implications and how they may influence the choice of investment.
This module should take around 60 minutes to complete. It includes a short self -assessment quiz to test what you have learned and a 60 minute CII/PFS accredited CPD certificate can be claimed.
Advisers need to understand who is entitled to the income and capital of the trust, the tax implications and how they may influence the choice of investment.
This module should take around 60 minutes to complete. It includes a short self -assessment quiz to test what you have learned and a 60 minute CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
- Explain the beneficiaries’ rights to income and capital
- Describe the difference for IHT of a lifetime gift into an interest in possession trust created before and after 21 March 2006
- Determine how an interest in possession trust is treated for income tax and CGT
Learning material
This module covers the reasons for creating an IIP trust, the difference between lifetime trusts and those created on the settlor’s death and a beneficiary’s right to income or capital. It also explains the taxation of the gift and trust assets for IHT, CGT and income tax.
CPD minutes: up to 60
Post learning assessment
Question 1
Which of the following statements in regard to using an IIP trust is incorrect?
a. IIP trusts can be created by a will on death or during a settlor’s lifetime.
b. At outset, no beneficiaries have an entitlement to income.
c. Settlors can choose to give a surviving spouse the right to income, while leaving an entitlement to the trust capital to other family members.
d. IIP trusts created on death are not subject to the relevant property regime
a. IIP trusts can be created by a will on death or during a settlor’s lifetime.
b. At outset, no beneficiaries have an entitlement to income.
c. Settlors can choose to give a surviving spouse the right to income, while leaving an entitlement to the trust capital to other family members.
d. IIP trusts created on death are not subject to the relevant property regime
Question 2
Question 2
How is a lifetime gift to an IIP trust, created after 21 March 2006, treated for inheritance tax purpose?
a. Potentially exempt transfer – with a 20% immediate charge on any amount above settlor’s unused nil rate band.
b. Chargeable lifetime transfer – with a 20% immediate charge on any amount above settlor’s unused nil rate band.
c. Potentially exempt transfer – with no immediate charge and no IHT if the settlor survives seven years.
d. Chargeable lifetime transfer– with no immediate charge but a tapered rate of IHT if settlor dies within seven years.
a. Potentially exempt transfer – with a 20% immediate charge on any amount above settlor’s unused nil rate band.
b. Chargeable lifetime transfer – with a 20% immediate charge on any amount above settlor’s unused nil rate band.
c. Potentially exempt transfer – with no immediate charge and no IHT if the settlor survives seven years.
d. Chargeable lifetime transfer– with no immediate charge but a tapered rate of IHT if settlor dies within seven years.
Question 3
Question 3
Which of these statements is TRUE about the income tax in relation to an IIP trust?
a. Trustees will be liable for income tax from investments at basic rate, unless income is directly mandated to the IIP beneficiary.
b. Trustees will be liable for income tax from investments at the additional tax rates, unless it is directly mandated to beneficiaries.
c. Beneficiaries are unable to use any unused personal tax allowances against investment income directly mandated to them by IIP trustees.
d. The trustees pay no tax on the £2,000 of dividend income.
a. Trustees will be liable for income tax from investments at basic rate, unless income is directly mandated to the IIP beneficiary.
b. Trustees will be liable for income tax from investments at the additional tax rates, unless it is directly mandated to beneficiaries.
c. Beneficiaries are unable to use any unused personal tax allowances against investment income directly mandated to them by IIP trustees.
d. The trustees pay no tax on the £2,000 of dividend income.
Check your answers
Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.