Taxation of an Interest in Possession Trust under English Law
Introduction: Facts and Legal Issue An interest in possession trust is one where a beneficiary (often called a life tenant) has the present right to the present enjoyment of trust income, such as receiving income as it arises from the trust assets. The core legal issue is the taxation of such trusts—specifically, how income tax, capital gains tax (CGT), and inheritance tax (IHT) apply to both the trustees and the beneficiaries. The answer below details each head of tax, drawing on current English law. 1. General Principles: Definition and Structure 2. Income Tax Treatment a. Liability and Mechanism b. Trustees’ Tax Position 3. Capital Gains Tax (CGT) 4. Inheritance Tax (IHT) a. Creation and Transfers Table: Summary of PET and CLT Rules Date of Creation/Transfer Type of Trust/Interest IHT Treatment Before 22 March 2006 Any interest in possession PET 22 Mar 2006–5 Oct 2008 Transitional serial interest (non-spouse) PET After 22 March 2006 Disabled, transitional serial, post-death PET All others Chargeable Lifetime Transfer (CLT) (“Prior to 22 March 2006, the lifetime creation of an interest in possession trust, and a transfer into an accumulation and maintenance trust, were PETs … but any such transfers on or after this date are CLTs. Between 22 March 2006 and 5 October 2008 the lifetime creation of an interest in possession settlement was a PET if it was a transitional serial interest … Since 6 October 2008, where an interest in possession created before 22 March 2006 comes to an end and is replaced by another interest in possession, an IHT charge will arise. The lifetime termination of an interest in possession … is a PET if the interest was created: before 22 March 2006; or on or after 22 March 2006, and it is an immediate post-death interest or a transitional serial interest … In all other cases, the lifetime termination of an interest in possession on or after 22 March 2006 is not a transfer of value for the life tenant, because the life tenant is not considered to have the assets within their estate.” ) b. On Death/Termination 5. Application to the Question: Tax Implications for an Interest in Possession Trust In summary, under English law: Conclusion The taxation of an interest in possession trust in England involves separate regimes for income tax, capital gains tax, and inheritance tax. Each area has its own complexities, with careful attention required regarding the timing of the creation and termination of the interest, the nature of the trust, and the precise structure of the rights conferred. Trustees and beneficiaries alike should ensure compliance with the reporting and calculation rules outlined above, and seek professional advice on planning or restructuring such trusts. Would you like to explore specific scenarios, such as the treatment of accumulated income, the interaction with overseas beneficiaries, or the tax implications of terminating an interest in possession? If you have a particular trust arrangement or transaction in mind, please provide further details so we can examine the relevant rules more closely and address any uncertainties.