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Interest in Possession Trust

An interest in possession trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust as it arises.

The trustee must pass the income, less any expenses, to the beneficiary.

The beneficiary entitled to the income of the trust for life is known as a life tenant or as having a life interest, and a beneficiary who is entitled to the trust capital is known as the capital beneficiary.

Customer Reviews
Expert Verdict

An interest in possession trust is a special kind of trust fund set up to entitle the beneficiary to any income as soon as it is produced.

It also allows you to benefit from living in and enjoying your property whilst it is in trust. 

Although a will is good (and it is important to have a will for various reasons), sometimes it isn’t enough. A trust provides you with a way to clearly set out your wishes and ensure that they are followed.

Key features of an interest in possession trust:

  • The beneficiary who receives income typically doesn’t have any rights over the capital – instead the capital will normally pass to a different beneficiary or beneficiaries in the future – but depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.
  • Interest in possession trusts offer the same IHT benefits as discretionary trusts, but they offer less immediate flexibility on the distribution of trust income. 
  • In comparison with discretionary trusts, interest in possession trusts are less suitable for minors, as income must be distributed to beneficiaries.

Inheritance tax complications of an interest in possession trust:

A lot of people look at setting up a trust fund to avoid inheritance tax, or reduce the amount they will have to pay.

But the amount of IHT your family will be liable to pay on your estate will vary greatly depending on the type of trust, how it is set up and your individual circumstances. 

If the house is worth over £325,000 it can attract inheritance tax. This is why estate planning is important.

You may also face a 20% bill immediately on any balance over £325,000 if you transfer the property to a lifetime trust, with a further possibility of a bill in ten years’ time.

This is in addition to income tax payable on payments made from the trust.

Although it’s often dependent on your personal situation, there are a few regulations and conditions to be aware of. IHT rules changed in 2006 – so any trust funds set up after this time may be subject to ten-yearly inheritance tax charges.

Inheritance tax will also be applied to your trust if you die within seven years of making a transfer from a different trust fund or investment scheme. 

Capital gains tax (CGT) may also be applicable on certain trust funds if you are determined to have profited from them.



The Pros

> Provides income payments and capital payments to different defined beneficiaries
> A sound, stable lifetime income for the surviving partner, where spouses establish an interest in possession trust together
> Protection of your property’s value against financial assessments should either of you require care at a later stage
> Remaining assets can be passed on to other beneficiaries – usually family members and children
> Complete control over who receives assets from your estate

The Cons

> The remainderman (entitled to capital benefit from the trust) is usually only able to access the capital after the death of the life tenant (entitled to income payments from the trust)
> Possibly complex tax implications. The trustees of the fund will be responsible for understanding these and submitting tax returns where required. Inheritance tax may be payable on the fund
> There are possible penalties involved in withdrawing from or transferring the fund should you wish to at a later date
> The selling process may be more complex if you wish to move or sell the property at a later date
What happens on the death of the life tenant?

The assets held in trust pass to the remainderman outside of the life tenant's estate.

How can I set up an interest in possession trust?

If you would like to set up an interest in possession trust you will need assistance from a regulated financial planner.

They’ll take into account your full portfolio of assets and any future needs or prognoses that need to be considered. They can then advice you on the best option and set up a trust fund that best suits your individual needs.

NOTE: Once a trust has been set up it may be possible to alter it or change the terms of your will at a later date.

Who are interest in possession trusts best suited to?

Different trust funds have different benefits depending on your individual circumstances and the outcomes you wish to achieve.

Interest in possession trusts are best suited to:

  • Couples who want to ensure that their surviving partner has a safe, stable source of income when they are gone.
  • Individuals who’d like to retain some of their assets to pass on to family members and children at a later date.
  • Individuals who wish to protect their property from being considered in financial assessments to determine how much they can pay towards future care costs.

Have you used an interest in possession trust?

Have you got experience of establishing an interest in possession trust?

Would you like to share your experience and opinion to help other people make an informed decision?

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Expert assessment of an interest in possession trust

An interest in possession trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis, as does the case for using trusts in general.

If you already have a trust structure in place and would like a Second Opinion - or, if you are wondering whether the utilisation of a trust could be of benefit to you, contact us.


NOTE: Because trusts are so unique to each individual, it’s impossible to give them a rating for their overall performance and suitability. Therefore these reviews do not come with a star rating.

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