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Life Interest Trusts Notes

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Life Interest Trusts Revision

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Life interest trusts 1) Life interest trusts created Pre 22nd March 2006 - created during lifetime OR by will

Creation of trust

a) Life interest trust created during lifetime

Overall effect

Life tenant is treated as the owner of the trust capital for IHT purposes even though they are only entitled to income - s.49(1) IHTA 1984

Inheritance tax

a) PET by settlor

Normal lifetime transfer PET rules apply


No IHT to pay on transfer


If dies within 7 years - 40%


Possible taper relief

As last date for this trust was 21st March 2006, last date on which the PETs can fail is 20th March 2013 b) Spousal exemption applies to this transfer if spouse is life tenant of trust

Capital gains tax

a) Is an actual chargeable disposal unless is disposing of:


Cash; or


Treasury shares / govt. bonds

Normal chargeable disposal rules apply


Calculate gain


Minus AE (£11,000)


Reduced gain x 0.18 / 0.28

b) Holdover relief:

s.165 à Available for business assets

s.260 à Not available as is a PET / No corresponding IHT Event

b) Life interest trust created by will

Income tax

No impact on income tax

Overall effect

Life tenant is treated as the owner of the trust capital even though they are only entitled to income - s.49(1) IHTA 1984

Inheritance tax

a) Part of testator's death estate

b) Spousal exemption applies to this transfer if spouse is life tenant of trust

Capital gains tax

No CGT on death

Income tax

No impact on income tax

Normal death estate rules apply


Cumulative total à NRB


Possible 2 x NRB as TNRB is available on death estate


Death time exemptions


Tax at 40%

During the lifetime of the trust

Life interest created during lifetime OR by will

Inheritance tax

No IHT payable as:


No periodic charges


No exit charges

Capital gains tax

a) Property remains in the trust

No CGT payable by the life tenant as:


Life tenant not deemed to own property for CGT purposes

b) Property is sold by trustee

Trustee's actual chargeable disposal rules apply


Calculate gain


Minus trustee's AE (£5,500)


Reduced gain x 0.28

a) Trustees - must pay income tax on any trust income

a) Non-Dividend income - 20% tax

Income tax

b) Dividend income - 10% tax

b) Life tenants - Must pay personal income tax on trust income once it has been paid out relative to their own income tax position

a) If have overpaid à Will claim a rebate

b) If have underpaid à Will pay more

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