Qualifying IIP or not?

We are acting for a trust created pre-2006. The terms are that the trustees have discretion to make distributions of income or capital to the beneficiaries, and if no income distributions are made in any given tax year, then a life tenant is entitled to the income.

Given that the life tenant doesn’t have an definitive right to enjoy the income of the trust, as him receiving it is dependent on whether or not the trustees choose to make discretionary distributions in that year, is his interest in possession non-qualifying and the settlement is therefore relevant property?

That certainly sounds like it is not an interest in possession. However, much will turn on the precise wording of the trust instrument. NB some trusts will provide for an interest in possession (IIP) / life interest for one beneficiary, but with the trustees having a power of appointment to change the way the capital / income is held; but this power of appointment does not mean there is no IIP - there is still an IIP unless or until that power is excercise. Having said that, this does not sound like what you have described and it may have been deliberately set up that way to avoid the inheritance tax implications of an IIP (pre-March 2006).

I have recently be dealing with an IoM trust in which person P had the right to the income, but subject to the trustees’ power to accumulate the income (so that P would not receive it) and P would only actually be entitled to the trust’s income to the extent that it was not formally accumulated by the trustees. In this case, it was important for there not to be an IIP.

Paul Davidoff
New Quadrant

I agree with Paul.

See CGT HMRC manual para 36320 for a useful comment on this issue.

Malcolm Finney