What is an interest in possession trust?

From an Income Tax perspective, an interest in possession trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust as it arises. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.

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’.

The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital of such a trust – instead the capital will normally pass to a different beneficiary or beneficiaries in the future. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.


Stanley is married to Kathleen. On his death Stanley’s Will creates a trust and all the shares he owned are to be held in that trust. The dividends (income) earned on the shares are to go to Kathleen for the rest of her life. When she dies the shares pass to the children.

Kathleen is the income beneficiary. She has an ‘interest in possession’ in the trust as she is entitled to the income (the dividends) arising on the trust assets for the rest of her life. Kathleen has no right to the capital. When she dies the trust ceases and all the capital (the shares) passes to the children.

Interest in possession trusts and Income Tax

Trustees are responsible for declaring and paying Income Tax on income received by the trust. They do this on a Trust and Estate Tax Return each year.

There are different rates depending on the type of income.

Interest in possession trusts are not normally taxed at the special rates of tax that apply to non-interest in possession trusts, which are 32.5 per cent for dividends and 40 per cent for all other income. But there are certain capital receipts that are deemed to be income and are taxed at these higher rates.

Special tax rules apply to interest in possession trusts with beneficiaries who are disabled or who are children who have lost a parent through death. (see below.)

Capital Gains Tax on an interest in possession trust

Capital Gains Tax is a tax payable on ‘gains’ (profits) made from the sale or transfer of assets such as shares, property or possessions. It is chargeable in the same way on all trusts, apart from bare trusts.

Trustees are liable to Capital Gains Tax on any chargeable gains above an amount set each year called the ‘annual exempt amount’.

Beneficiaries are not taxed on any trust gains and do not get credit for tax paid by the trustees.

Inheritance Tax on an interest in possession trust

From an Inheritance Tax perspective, an interest in possession may also include the right to enjoy a non-income producing asset, for example the right to live in a house.

There may be an Inheritance Tax charge when:

  • assets (money or property) are put into an interest in possession trust
  • an interest in possession trust reaches a ten-year anniversary
  • assets are distributed from an interest in possession trust

It is worth noting that the Inheritance Tax regime sometimes uses its own classification for trusts. Interest in possession trusts may fall within what are known as ‘relevant property’ trusts.

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