Interest in possession beneficiaries (life tenants)—income tax
Produced in partnership with Jordan Ellis of Trowers & Hamlins LLP
Interest in possession beneficiaries (life tenants)—income tax

The following Private Client guidance note Produced in partnership with Jordan Ellis of Trowers & Hamlins LLP provides comprehensive and up to date legal information covering:

  • Interest in possession beneficiaries (life tenants)—income tax
  • The source of the beneficiary's income
  • Liability for income tax
  • When income tax becomes due
  • Steps for calculating income tax
  • Practical example
  • Annuities
  • Income versus capital receipts
  • Trust management expenses
  • Reporting income tax to HMRC

Broadly speaking, a life tenant is entitled to receive the income from an interest in possession (IIP) trust and that income will be taxed at the life tenant's marginal rates. This is the case both when the trustees first receive the income and then pay it to the life tenant and when the trustees have ‘mandated’ the income to the life tenant so that the life tenant receives it directly. Although the overall income tax treatment is the same, the process for declaring the income and paying any tax due on it differs.

The source of the beneficiary's income

The source of the income of a life tenant of an IIP trust is the trust property itself, rather than the right that is enforceable against the trustees to have the trust properly administered. Therefore, the life tenant's sources of income for income tax purposes will match the underlying investments made by the trust.

The life tenant is specifically entitled to the trust income that has not been used to pay any trust management expenses. In other words, they are entitled to the net income arising from the trust property. For more information on trust management expenses, see Interest in possession beneficiaries (life tenants)—income tax below and Practice Note: Trust expenses.

Liability for income tax

As the life tenant is entitled