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

FORTHCOMING CHANGE: As originally announced at Autumn Budget 2017 and followed up by written statement after Spring Statement 2018, plus an announcement in Budget 2018, the government ran a consultation on the taxation of trusts from 7 November 2018 to 28 February 2019, inviting views on the principles of transparency, fairness and simplicity that it believes should underpin the taxation of trusts. In response, in July 2019, the Office of Tax Simplification issued its second report on inheritance tax. See also the report published by the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness in January 2020 recommending the adoption of a new inheritance tax regime. See also the research exploring the use of trusts which was also published on 7 November 2018. See News Analysis: Exploring the consultation and review on the taxation of trusts.

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