An Interest in Possession Trust is a trust where the beneficiary of a trust has an immediate and automatic right to the income from the trust. Even though the income is paid to the Trustee (the person running the trust) then they must pass all of that income to the beneficiary, net of any trust expenses.

Interest in possession trusts have two different types of beneficiary, the beneficiary who gets the income of the trust, and one who will actually get the asset and investments in the trust.  A beneficiary who is entitled to the income of the trust for life is known as a ‘life tenant’ or as ‘having a life interest’. A beneficiary who is entitled to the trust capital is known as the ‘remainderman’ or the ‘capital beneficiary’, this beneficiary will be entitled to the capital of the trust once the interest in possession (life interest) comes to an end.

An interest in possession trust can be a lifetime trust or the conditions establishing the trust can be in the person’s will.

An interest in possession trust is different from a discretionary trust because the trustees do not have control over how the assets are distributed.

Trustees are responsible for declaring and paying Income Tax on income received by the trust. Capital gains tax is payable on the profits earned by the trust. Trustees have to pay capital gains tax on any amount over the annual exempt amount. How the trust is treated in terms of inheritance tax depends on whether it was set up while the person was alive or in their will.

An Interest in Possession Trust may be suitable for a settlor who wants to:

• Ensure that a particular beneficiary has the right to receive the income from the trust assets without giving him control over those assets (for example, to ensure that the assets later pass to the settlor’s children from a previous marriage). The settlor may want to do this during his lifetime, rather than in his will, so that he can oversee the initial running of the trust and ensure that arrangements are working smoothly before he dies; or
• Defer the remaindermen’s right to receive the trust capital until the life tenant dies, or until the life tenant no longer needs the income that the capital generates.

An Interest in Possession Trust may not be suitable if:

• The trust is likely to generate a large amount of income and the settlor does not want any beneficiary to be entitled to receive this. 

This Interest in Possession Trust is in Microsoft Word format, written in plain English, easy to use and edit.