Interest in
Possession Trust

An independent review by our team of experts

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:

No rights over the capital are given to the beneficiary who receives income. The capital will normally pass to a different beneficiary or beneficiaries in the future. However, 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.
Discretionary Trusts have similar IHT benefits to the Interest in Possession Trusts.
Interest in possession trusts are less suitable for minors, as income must be distributed to beneficiaries. However, Interest in Possession Trust has greater flexibility when it comes to immediate income access.

Inheritance tax complications of an interest in possession trust:

Avoiding inheritance tax is one of the reasons many people use trusts. However, the type of trust you chose and how it is set up to match your needs will determine the IHT payable on your estate.

If your house/estate is worth over £325,000 it can attract inheritance tax.

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.

NOTE:

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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.

Based on your current circumstances, goals and needs, they can advice you on the best option and set up a trust fund for you.

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 and it all depends on what you are looking to achieve.

Interest in Possession Trusts are best suited to:

Couples who want to secure a safe, stable source of income for their partners if the worst happens.
People who want to pass on their assets to their family at a later date.
Individuals who want to protect their property.

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.

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by AES to be reliable and AES has reasonable grounds to believe that all factual information herein is true as at the date of issue. It does not constitute investment advice, recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. AES accepts no responsibility for loss arising from the use of the information contained herein.

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RISKS

Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investment, when redeemed, may be worth more or less than the capital invested. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful. For further information, please click here.

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.

Interest in
Possession Trust

An independent review by our team of experts

REVIEW SUMMARY