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How does it work?

• The beneficiary has the right to receive an income for a defined period from the trust (usually for the remainder of the beneficiary’s life) but not the right to the capital held within the trust. Thus, rented property can produce the income but the property itself remains within the trust.

• The ‘interest’ will cease when a beneficiary becomes ‘absolutely entitled’ to the trust assets either on a death (for example on the death of a surviving parent or when some special condition is met (e.g. upon reaching a specified age, say, 18 years)). On being absolutely entitled the beneficiary can direct the trustees as to how to deal with the property; the beneficiary may even require the property to be transferred to him or her.

Advantages

• ‘Interest in possession’ trusts are a potentially useful way of providing a safe income for dependants of the settlor, whilst ensuring that the property is saved to be passed on at a later date.

• On the death of someone who has an ‘interest in possession’, the ‘interest’ comes to an end and the beneficiary becomes absolutely entitled to the trust property, but no CGT is due (but neither are any capital losses allowable).

•  A chargeable gain will only arise to the trust if the cost of the property had been reduced by ‘hold-over’ relief on transfer into the trust, the gain being equal to the amount ‘held-over’.