Interest in Possession Trusts
What Does “Interest in Possession” Mean?
An interest in possession exists where a beneficiary has an immediate, enforceable entitlement to trust income or use of trust assets. Unlike discretionary trusts:
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The trustees do not decide whether the life tenant benefits
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The entitlement arises automatically under the trust deed
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The life tenant can generally insist on their entitlement
Most commonly, this interest lasts for life, which is why these trusts are often called Life Interest Trusts in client-facing contexts.
How an Interest in Possession Trust Works
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An IIP Trust typically involves:
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Settlor – the person who creates the trust
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Trustees – who hold and manage the trust assets
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Life tenant – the person entitled to income or use of the trust assets
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Remainder beneficiaries – those entitled to the trust capital when the life interest ends
A common example is where a surviving spouse is entitled to live in a property or receive trust income for life, with children inheriting the capital thereafter.
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Common Uses of Interest in Possession Trusts
Interest in Possession Trusts are frequently used where certainty and balance are required, particularly in family situations.
Typical planning contexts include:
Second Marriages and Blended Families
Ensuring a surviving spouse is provided for during their lifetime, while preserving capital for children from an earlier relationship.
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Property Trusts
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Allowing a beneficiary to live in a property for life, with clear rules about maintenance, occupation, and eventual succession.
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Succession Planning
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Providing stable income to one generation while safeguarding capital for the next.
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Estate Administration on First Death
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Used in wills to avoid assets passing outright, while still ensuring immediate provision for a surviving partner.
HMRC Inheritance Tax Position – Very Important Distinctions
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The tax treatment of an Interest in Possession Trust depends heavily on when it was created and how it arises.
IIP Trusts Created on Death (Will Trusts)
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Where an Interest in Possession Trust is created under a will:
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The trust assets are treated as part of the life tenant’s estate for IHT purposes
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On the life tenant’s death, the trust fund is aggregated with their estate
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No relevant property regime applies
This means:
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No 10-year charges
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No exit charges
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IHT is dealt with on death, broadly as if the life tenant owned the assets outright
This treatment is one of the main reasons IIP Trusts are popular in spousal and family will planning.
IIP Trusts Created During Lifetime
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Lifetime-created IIP Trusts are treated differently.
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The creation of the trust is generally a Chargeable Lifetime Transfer (CLT)
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The trust typically falls within the relevant property regime
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This can give rise to:
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Entry charges (above the Nil Rate Band)
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Ten-year periodic charges (up to 6%)
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Exit charges
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As a result, lifetime IIP Trusts require particularly careful planning and are used more selectively.
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Allowing a beneficiary to live in a property for life, with clear rules about maintenance, occupation, and eventual succession.
Income Tax Position
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The income tax position reflects the life tenant’s entitlement:
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Trust income is generally treated as belonging to the life tenant
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The life tenant is taxed at their personal income tax rates
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Trustees may pay income to the life tenant gross or with basic-rate tax depending on structure
This often makes IIP Trusts more income-tax-efficient than discretionary trusts where regular income is required.
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Capital Gains Tax Position
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For CGT purposes:
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Trustees are responsible for CGT on disposals
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Hold-over relief may be available in certain circumstances
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On the death of the life tenant, assets generally receive a CGT uplift to market value
This can be a significant advantage in long-term planning.
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Trustees and Practical Considerations
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Trustees of an IIP Trust must:
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Protect the interests of both life tenant and remainder beneficiaries
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Balance income needs with capital preservation
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Apply the trust strictly in accordance with its terms
Poor drafting can easily lead to disputes between life tenants and remaindermen, which is why precision is critical.
How CHC Legal Assists
CHC Legal supports clients with Interest in Possession Trusts by:
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Advising on whether an IIP Trust is appropriate
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Drafting bespoke will and lifetime trust structures
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Coordinating IIP Trusts with property ownership and succession planning
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Reviewing existing IIP Trusts where family circumstances have changed
Our approach is always planning-led, ensuring the trust reflects real family dynamics rather than abstract assumptions.
Summary
An Interest in Possession Trust provides certainty, stability, and fairness where competing interests must be balanced over time. It is particularly effective in will planning and family protection, offering a clear alternative to both outright inheritance and fully discretionary structures.
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When used appropriately—and drafted correctly—it remains one of the most elegant tools in trust and estate planning.
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