1 December 2023
An interest in possession trust enables you to stay in your own home whilst transferring the assets to a trust to protect them for your spouse and future generations
An interest in possession trust, also known as an iip 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. Income mostly includes financial interest accrued, but could also cover you living in and enjoying your property for years to come.
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.
Different trust funds have different benefits depending on your individual circumstances and the outcomes you wish to achieve.
It is important to obtain independent and impartial advice – but also to speak to family members you trust regarding your decision. 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
Here is a short video that explains how life interest trusts can be used to protect assets
There are a number of different types of trusts on the market – so the choice can be overwhelming. Different trust funds have different benefits and drawbacks depending on your situations. Benefits of interest in possession trusts include:
– 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
– 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
Lots 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 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 professional assistance from a legal professional.
They will be able to discuss your personal situation with you and listen to your wishes. They’ll take into account your full portfolio of assets and any future needs or prognoses that need to be considered. They can then advise you on the best option and set up a trust fund properly.
At this point, the solicitor can explain the way the trust fund will work and the tax implications of it. 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.
A solicitor will be able to help you set up an IIP trust.
Rob writes and edits the content produced by the rest of the team. He has a degree in History from Leeds University and has producing, reviewing and editing the site since 2016
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