How To Set Up An Interest In Possession Trust In The UK

An interest in possession trust is a type of trust where a beneficiary, known as the ‘life tenant,’ has a legal right to receive income generated by the trust assets for their lifetime or a specified period. However, they do not have access to the capital itself, which is ultimately intended for other beneficiaries, known as ‘remaindermen.’ This form of trust can be an effective way to manage assets, control how they are distributed, and potentially reduce inheritance tax. Here’s a step-by-step guide on how to set up an interest in possession trust in the UK.

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1. Understanding the Purpose of an Interest in Possession Trust

Before setting up an interest in possession trust, it’s important to understand its purpose and suitability. This type of trust can be used for various reasons, such as:

• Providing for a spouse or partner: The trust allows a spouse or partner to receive income from the assets during their lifetime, while the capital can be preserved for children or other beneficiaries.
• Asset protection: It helps to protect assets from creditors or beneficiaries who may be financially irresponsible.
• Inheritance tax planning: Under certain conditions, assets placed in the trust may fall outside of the settlor’s estate for inheritance tax purposes, potentially reducing the tax burden on the beneficiaries.

Knowing these benefits helps in deciding if this is the right type of trust for your needs.

2. Determine the Trust Assets

The next step involves deciding which assets will go into the trust. An interest in possession trust can include various types of assets, such as:

• Cash or savings
• Investment portfolios
• Property (residential or commercial)
• Shares in a company

When choosing assets, consider their potential to generate income. Since the life tenant is entitled to receive the income, it’s best to select assets that provide regular returns, like rental properties, shares that pay dividends, or interest-generating investments.

3. Identify the Parties Involved

An interest in possession trust involves three main parties:

• The settlor: This is the person who creates the trust and contributes the assets.
• The trustees: Individuals or institutions responsible for managing the trust assets and ensuring that the terms of the trust are met. The trustees have a fiduciary duty to act in the best interests of the beneficiaries.
• The beneficiaries: In an interest in possession trust, there are usually two types of beneficiaries. The life tenant is entitled to receive the income from the trust assets, while the remainder beneficiaries will inherit the assets once the interest in possession ends (usually upon the life tenant’s death).

It is crucial to choose trustees carefully, as they will play a significant role in managing the trust. Professional trustees, such as solicitors or accountants, can be appointed to ensure compliance with legal and financial regulations.

4. Decide on the Trust Duration

Deciding how long the trust will last is another important consideration. While many interest in possession trusts are established for the lifetime of the life tenant, there could be specific circumstances where the trust is set for a defined period. For instance, it might last until a child reaches a certain age or a beneficiary’s life situation changes.

The duration of the trust should align with the intended purpose of the trust and the needs of the beneficiaries. This aspect can be incorporated into the trust deed, which outlines the terms of the trust.

5. Drafting the Trust Deed

The trust deed is a legally binding document that sets out the terms and conditions of the trust, including:

• The identities of the settlor, trustees, and beneficiaries
• The assets being placed in the trust
• The rights of the life tenant and remaindermen
• The duration of the trust
• The powers and responsibilities of the trustees

Given the complexity and legal nature of a trust deed, it is advisable to seek professional legal advice from a law firm experienced in setting up trusts. At Blackstone Solicitors, we provide expert guidance to ensure the trust deed is properly drafted and tailored to meet your specific objectives.

6. Appoint Trustees

Once the trust deed is drafted, the trustees need to be appointed formally. The trust deed will usually specify the procedure for appointing and replacing trustees, as well as their powers. Trustees should be individuals or institutions you trust to manage the assets responsibly and in line with the terms set out in the trust deed.

7. Transfer the Assets into the Trust

After the trust deed is signed, the next step is to transfer the chosen assets into the trust. This means legally changing the ownership of the assets from the settlor to the trustees, who will hold the assets on behalf of the trust.

The process of transferring the assets can vary depending on the type of assets involved:

• Cash and investments: This may involve setting up a trust bank account or transferring investments into a trust-held investment portfolio.
• Property: For property, the transfer must be registered with HM Land Registry, and legal documents may need to be prepared to reflect the change in ownership.

8. Register the Trust with HMRC

It is now a legal requirement in the UK for all taxable and non-taxable trusts to be registered with HM Revenue and Customs (HMRC) using the Trust Registration Service (TRS). The trustees are responsible for ensuring the trust is registered and providing details such as:

• The trust’s name and type
• The settlor’s details
• The trustees’ details
• The beneficiaries’ details
• The assets held in the trust

Registration is important, not just for compliance but also for transparency in tax reporting. Failure to register the trust can result in penalties.

9. Understand the Tax Implications

Trusts can have complex tax implications, so it’s essential to understand how an interest in possession trust may affect the settlor, trustees, and beneficiaries. Some key points to consider are:

• Income tax: The life tenant will be responsible for paying income tax on the income they receive from the trust, potentially at a higher rate.
• Inheritance tax: While assets placed in the trust may be outside the settlor’s estate for inheritance tax purposes, periodic charges (known as the ten-year anniversary charge) may still apply.
• Capital gains tax: If the trustees sell assets within the trust, any gain realised may be subject to capital gains tax, although exemptions and reliefs may apply.

Seeking professional tax advice is crucial to managing these obligations effectively and planning for any tax liabilities that may arise.

10. Ongoing Trust Administration

Setting up the trust is only the first step. Ongoing administration is required to ensure the trust remains compliant with legal and tax obligations. Trustees must:

• File annual tax returns for the trust
• Maintain detailed records of trust activities
• Distribute income to the life tenant as per the trust deed
• Review the trust’s investments and assets periodically

Professional support from a solicitor or accountant experienced in trust management can be invaluable to ensure that trustees fulfil their duties and the trust remains in good standing.

11. Reviewing the Trust Periodically

Even after the trust is set up and running, it is wise to review the trust periodically to ensure it continues to meet its objectives and comply with any changes in law or tax regulations. Regular reviews also help in adjusting the trust’s terms if needed, such as adding or changing beneficiaries or updating the trustees.

Conclusion

Setting up an interest in possession trust in the UK can be a powerful tool for estate planning, asset protection, and tax management. However, the process involves several legal and administrative steps, making it essential to approach it carefully and with professional guidance.

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We have a proven track-record of helping clients create Trusts. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

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It is important for you to be well informed about the issues and possible implications of creating a Trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.

To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Blog, News Tagged as

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