IPDI - tax treatment of portfolio
Wildparaplanner
Member
Hi,
We have a case where a client passed away and left both the house and a small £80k portfolio into an Immediate Post Death Interest (IPDI) Trust formed by the will where the spouse (life tenant) is entitled to an income from the portfolio in addition to living in the house. Ultimate beneficiaries are the children of the deceased (who aren't the direct children of the remaining living spouse).
I can only seem to find technical information that relates to Interest In Possession (IIP) Trusts, and even that isn't straightforward to understand.
Can anyone explain to me what the tax treatment is of the following and who pays the tax:
1) Any capital gains realised on the portfolio - are they on the life tenant with full £3,000 exemption, or on trustees with half £1,500?
2) Any income generated by the portfolio that is paid to the life tenant - is this assessed on the life tenant or on the trust?
3) Do trustees need to do a tax return as a result of this portfolio?
Appreciate the help.
Thanks
Comments
Referring to my Financial Planning with Trusts book (Wooley/Banner) then an IPDi does create an IIP (for tax) - as we would expect.
Assuming the trustees have not mandated the income then the trust is liable to 20% (savings) and 8.75% (dividend) which they do a tax return and pay.
Trustees provide the beneficiary with an R185 (tax credit form) which the beneficiary uses in conjunction with their own tax return.
CGT. An IPDI is treated as a "qualifying interest in possession" trust (post 21/03/2006), any CGT falls on life tenant and the the full allowance is available (which makes sense given there is an uplift for cgt on death of life tenant as they have to include the capital value in their estate for IHT.
The income would be mandated straight to the life tenant's bank account, and not via the trust. My understanding now is that this income (paid directly from the provider to the life tenants bank account) would be assessable to tax on the life tenant.
RE CGT - taken from abrdn techzone:
During the life of the trust
If the trustees dispose of trust assets (for example, if they sell a mutual fund or a property) the gains are calculated in the same way as for an individual and taxed at the trust rate of CGT. The trustees are only entitled to half the individual annual CGT exempt amount. However, this exemption is shared equally between all trusts created by the same settlor, subject to a minimum of one fifth of the trust exemption.
Trustees can also claim principal private residence (PPR) relief on the disposal of residential property that has been occupied by a beneficiary of the trust as their only or main residence.
This seems to suggest CGT is on the trustees to pay?
Income: If mandated; yes fully taxable for life tenant and avoids the trust tax / tax credit step.
Re-reading my 'book' I missed a heading - termination of a life interest as a precursor
and looking to earlier in the section I revise my previous answer to match abrdn.
The IPDI will get an uplift on the death of a life tenant for future CGT purposes, and the death of a life tenant is not a disposal for CGT within the IPDI.