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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.
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:
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.
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.
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: