Interest in Possession Trust

Interest in Possession Trust
Interest in Possession Trust
Full Overview Of Interest in Possession Trust

The Interest in Possession Trust (IIP Trust) is a specialised trust with unique features and benefits. It is a valuable tool for estate planning and asset management. The trust provides a beneficiary, known as the life tenant, with the right to enjoy the income generated by the trust assets for their lifetime or a specified period. Meanwhile, the capital or remaining assets are preserved for future beneficiaries. This overview will explore the details of IIP trusts, including their structure, benefits, taxation implications, and practical applications.

Structure of an Interest in Possession Trust

An IIP trust typically involves three key parties: the settlor, the trustees, and the beneficiaries. The settlor is the individual who creates the trust and transfers assets into it. The trustees are responsible for managing the trust assets in accordance with the trust deed and the law. The beneficiaries are divided into two categories: the life tenant and the remaindermen.

  1. Life Tenant: The life tenant has the right to receive income from the trust assets. This income can come from various sources, such as dividends, rental income, or interest. However, the life tenant does not have a right to the trust’s capital.
  2. Remaindermen: The remaindermen are the beneficiaries who will receive the trust capital upon the termination of the life interest. This usually occurs upon the life tenant’s death or after a specified period.

Establishing an IIP Trust

To establish an IIP trust, the settlor must draft a trust deed, which is a legal document outlining the terms and conditions of the trust. The trust deed specifies the identity of the trustees, the life tenant, and the remaindermen, along with their respective rights and obligations. The settlor then transfers assets into the trust, which can include cash, investments, property, or other valuable items.

Benefits of an Interest in Possession Trust

  • Income for the Life Tenant: One of the primary benefits of an IIP Trust is that it provides a stable income for the life tenant. This can be particularly advantageous for spouses or dependents who require financial support during their lifetime.
  • Asset Protection: By placing assets in a trust, the settlor can protect them from potential claims by creditors or from being squandered by irresponsible beneficiaries. The assets are managed by trustees, who have a fiduciary duty to act in the best interests of the beneficiaries.
  • Tax Planning: IIP Trusts can offer tax advantages, particularly in the context of inheritance tax. Under certain conditions, assets in an IIP Trust may not be subject to immediate inheritance tax upon the settlor’s death, thereby potentially reducing the tax burden on the estate.
  • Estate Management: An IIP Trust provides a structured way to manage and distribute assets. This can be especially useful for complex estates or individuals who wish to ensure that their assets are handled according to specific wishes.

Taxation of Interest in Possession Trusts

The taxation of IIP trusts is a critical consideration, as it affects the life tenant and the remaindermen. The key tax areas to consider are income tax, capital gains tax, and inheritance tax.

  1. Income Tax: The life tenant is liable to pay income tax on the income they receive from the trust. The income is taxed at the tenant’s marginal tax rate. Trustees are responsible for ensuring that the correct amount of tax is paid, and they must provide the life tenant with a tax certificate detailing the income received and the tax deducted.
  2. Capital Gains Tax: Trustees may be liable to pay capital gains tax (CGT) on any gains realised from the disposal of trust assets. The tax rate for trustees is generally higher than for individuals, and they are entitled to a lower annual exempt amount. However, if the trust assets are transferred to the remaindermen, there may be reliefs or exemptions available.
  3. Inheritance Tax: The inheritance tax implications for IIP Trusts can be complex. Upon the death of the life tenant, the trust assets are treated as part of the life tenant’s estate for inheritance tax purposes. This means that the value of the trust assets is added to the life tenant’s estate and may be subject to inheritance tax. However, if the IIP Trust was created before 22 March 2006, different rules may apply, potentially offering more favourable tax treatment.

Practical Applications of Interest in Possession Trusts

IIP Trusts can be utilised in various scenarios, offering flexibility and control over the distribution of assets. Some common applications include:

  1. Providing for a Spouse or Partner: IIP Trusts are often used to provide for a surviving spouse or partner. The life tenant receives income from the trust assets, ensuring their financial security, while the capital is preserved for the children or other beneficiaries.
  2. Managing Family Wealth: For families with substantial wealth, an IIP Trust can help manage and protect assets across generations. It ensures that family wealth is preserved and distributed according to the settlor’s wishes.
  3. Supporting Dependents: An IIP Trust can be established to support dependents, such as children or disabled relatives. The trust can provide a steady income for their needs while safeguarding the capital.
  4. Succession Planning for Businesses: Business owners can use IIP Trusts to ensure a smooth transition of business assets. The trust can provide income to the life tenant, such as a spouse, while preserving the business for future generations.

Challenges and Considerations

While IIP trusts offer numerous benefits, they also come with specific challenges and considerations that need to be carefully addressed:

  1. Complexity: Establishing and managing an IIP trust requires a thorough understanding of trust law and tax regulations. Professional advice is essential to ensuring the trust is set up and administered correctly.
  2. Cost: Creating and maintaining an IIP trust involves costs, including legal fees for drafting the trust deed, ongoing administration costs, and potential tax liabilities.
  3. Trustee Responsibilities: Trustees have significant responsibilities, including managing the trust assets, ensuring compliance with legal and tax obligations, and acting in the best interests of the beneficiaries. It is crucial to appoint trustees who are capable and trustworthy.
  4. Changing Circumstances: Life circumstances can change, affecting the suitability of the trust’s terms. It is important to build flexibility into the trust deed to accommodate future changes, such as adding new beneficiaries or changes in tax laws.


Interest in Possession Trusts are a valuable tool for estate planning. They provide income for a life tenant while preserving capital for future beneficiaries. These trusts offer numerous benefits, including asset protection, tax planning advantages, and structured estate management. However, the complexity and potential costs associated with IIP Trusts require careful planning and professional advice.

For individuals considering an IIP trust, working with experienced solicitors and financial advisors is essential to ensuring that the trust is tailored to their specific needs and circumstances. At DLS Solicitors, we are committed to providing expert guidance and support throughout the process. We help our clients navigate the intricacies of IIP Trusts and achieve their estate planning objectives. Whether you want to provide for a loved one, manage family wealth, or ensure the smooth succession of business assets, an Interest in Possession Trust could be the ideal solution.

Interest in Possession Trust FAQ'S

An Interest in Possession Trust is a type of trust in which a beneficiary (known as the life tenant) has the right to receive income from the trust assets for life or a specified period. The capital of the trust is preserved for other beneficiaries (known as remaindermen), who will receive it after the life tenant’s interest ends.

The life tenant is the primary beneficiary who has the right to the trust income. Remaindermen are the beneficiaries who will receive the capital after the life tenant’s interest ends. Both individuals and entities, such as charities, can be beneficiaries.

The income generated by the trust is taxed as the life tenant’s income, and they are responsible for paying income tax on it. The trust may be subject to inheritance tax (IHT) charges, including a potential 10-year periodic charge and an exit charge when capital is distributed to the remaindermen.

Trustees must manage the trust assets prudently, ensure that income is paid to the life tenant, preserve the capital for the remaindermen, keep accurate records, and comply with legal and tax obligations. They must act in the best interests of all beneficiaries.

Changing the terms of an Interest in Possession Trust generally requires the consent of all beneficiaries or a court order. The trust deed may also provide specific provisions for amendments. Any changes must comply with trust law and may have tax implications.

When the life tenant dies, their interest in the trust ends, and the trust assets are distributed to the remaindermen according to the terms of the trust deed. This transfer may trigger inheritance tax and other tax obligations.

In an interest-in-possession trust, the life tenant has a fixed right to the trust income, whereas, in a discretionary trust, the trustees have discretion over how the income and capital are distributed among the beneficiaries. Discretionary trusts offer more flexibility but are subject to different tax rules.

Advantages include providing a steady income stream to the life tenant, preserving capital for future beneficiaries, potentially reducing inheritance tax liability through effective estate planning, and offering a clear structure for asset distribution.

Removing a life tenant is generally difficult and requires their consent, a court order, or specific provisions in the trust deed. Trustees must act in accordance with the trust’s terms and the interests of all beneficiaries.

The value of the trust is calculated based on the value of the trust assets at the relevant time (e.g., at the 10th anniversary or when capital is distributed). The life tenant’s interest is typically valued based on their life expectancy and the income produced by the trust. Professional valuation and tax advice are recommended to ensure accurate calculations and compliance with tax laws.

For specific advice and assistance with interest in possession trusts, consulting a solicitor or financial advisor specialising in trust law and tax planning is recommended.


This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 11th July 2024.

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