Interest in possession trust

Interest in possession trust
See also
Grantor trust Gross proceeds Absolute title Easement In Gross Collateral assignment In-kind distribution Separate property Capital dividend account Prepaid rent

The interest in possession trust from an Income Tax perspective is that where the beneficiary of a trust has an automatic right and an immediate to the income from the trust as it occurs. The person running the trust (the trustee) have to pass all of the income received which is less any trustees’ expenses, to the beneficiary.

The beneficiary who is enabled to the income of the trust for life is noted as:

• having a life interest or
• a life tenant.

A beneficiary who is enabled to the trust capital is noted as:

• capital beneficiary or
• the remainderman.

The beneficiary who receives income ("the income beneficiary") frequently does not have any rights about the capital of such a trust. However, the capital will usually pass to various beneficiary or beneficiaries in the future. Considering the terms of the trust, the trustees can have the power to shell out capital to a beneficiary even though that beneficiary just has a right to obtain income.

Inheritance Tax of an interest in possession trust

The interest in possession from an Inheritance Tax perspective can also contain the right to possess a non-income producing asset (for example - the right to reside in a house). There can be an Inheritance Tax charge when:

• wealth is distributed from an interest in possession trust,
• an interest in possession trust extents a ten-year anniversary,
• wealth (property or money) are put into an interest in possession trust.

The Inheritance Tax regime sometimes take advantage of its own classification for trusts. The interest in possession trusts can fall within what is known as "relevant property" trusts.

Capital Gains Tax and Income Tax

Capital Gains Tax and Income Tax on accumulation and maintenance trusts are generally the same as for discretionary trusts. Nevertheless, there is some except that if a beneficiary becomes enabled to income, that share of the trust's income becomes taxed as the interest in possession trust. Therefore, the settlor can be tempted to put money into maintenance trust and accumulation for the benefit of children and paid out to them. However, every income of the trust exceeding during a year £100 paid out to an unmarried under the age of 18 children is treated as the settlor's own income.

References

• Barton M., Road H., Wheatons P., (2011)., Acca P6 advanced Taxation FA2012 - Study text 2013, Bpp Learning Media
• Bohan B., McCarthy F., McLoughlin A., (2013)., Bohan and McCarthy - Capital Acquisitions Tax, A and C Black
• Goel S., (2009)., Wealth Management: The new business model, Global India Publications
• Hughes P., (2006)., Tax Planning for Businesses and Their Owners: A Specially Commissioned Report, Thorogood Publishing
• Moffat G., (2005)., Trusts Law: text and materials, Cambridge University Press

Author: Klaudia Święs