CG36330 - Life interests and interests in possession: Interests in possession: meaning
For deaths before 6 April 1996, the legislation in TCGA92/S72 - TCGA92/S74 only applied to `LIFE INTERESTS' in possession, and not to all interests in possession. See however CG36330 for the concessional extension of the legislation to interests in possession which are not life interests. In Scotland the equivalent expression is `LIFERENT' and the instructions which follow apply equally to Scottish liferents, with the exception of `PROPER LIFERENTS', for which see CG31300+.
Life interest in possession
Interests of minors: Trustees Act 1925
Age of majority
Protective interests
Interest for life of another
Trustee’s discretion
Annuities
Life interest in possession
An interest which is primarily defined by reference to a life, although it may terminate on the happening of an event during that life, is a life interest. An example of such an interest is where property is held in trust to pay income to a widow during her life or until she remarries.
The three examples which follow are not life interests, because they are not defined by reference to a life, but a specific period. They are however interests in possession
- A trust to pay income to A for ten years and then for B absolutely is not a life interest; if A should die after five years his interest will not cease but will pass to his estate.
- A trust to pay income to A until he attains the age of twenty-five if he lives until then is not a life interest, as A's interest is not primarily defined by reference to a life, but his 25th birthday.
- An absolute vested interest where the person with the interest is not absolutely entitled as against the trustee because of the principle in Crowe v Appleby, see CG37510+, is not a life interest.
Interests of minors: Trustees Act 1925
The Trustee Act 1925, and the Trustee (Northern Ireland) Act 1958, have effect in England and Wales, and Northern Ireland, respectively. The particular provisions described below take effect unless there is a ‘contrary indication’ in the deed or will.
Where in England and Wales and Northern Ireland a minor has an interest in capital or income (or both) under a will or trust deed (or, in England and Wales only, under a statutory trust of an intestate's estate) and the interest is contingent on the happening of some event, for example, the attainment of a specified age or marriage, he or she normally during minority does not have an interest in possession, because the interest is subject to the discretion of the trustees. See Trustee Act 1925 section 31(1) and Trustee Act (Northern Ireland) section 32(1).
If the minor does not become absolutely entitled to the capital on attaining the age of majority, for example, because the specified age is twenty-five, he or she is entitled under the Trustee Acts, unless the deed or will provides to the contrary, to receive the income until becoming absolutely entitled to the capital. Although this is an interest in possession, it is not a life interest because it is not primarily defined by reference to a life.
Where a minor has a life interest in settled property, he or she will on attaining the age of majority or earlier marrying or registering as a civil partner become absolutely entitled to any accumulation of income retained by the trustees during minority. Such accumulation may have been invested and include chargeable assets.
Age of majority
The age of majority was reduced from 21 to 18 as from 1 January 1970 (Section 1 Family Law Reform Act 1969, and Section 1 Age of Majority (Northern Ireland) Act 1969). Where, however, an interest arises under a will or trust deed made before 1 January 1970 (or, in England and Wales only, under a statutory trust of an estate of an intestate who died before that date), the age of majority remains twenty-one for the purposes of interpreting the will, etc; if the original instrument was made before 1 January 1970, but the interest arises under an appointment made on or after that date, the age of majority is taken as eighteen. See Begg-McBrearty v Stilwell, 68TC426.
These principles also govern the application of the provisions of the Trustee Acts, as described in CG36525+, to pre-1970 deeds and wills. Most other statutes which refer to an age of majority or infancy are treated as referring to the age 18 instead of 21. This may cause difficulties in the case of deeds or wills made before 1925, which are not governed by the Trustee Act, but by earlier legislation. If necessary BAI Assets, Residence and Valuation (Technical) or Capital Gains Technical should be consulted.
Minors: Scotland
Scotland has no equivalent to the Trustee Acts referred to in CG36525. Where however in Scotland a minor has an interest in capital under a will or trust deed contingent on the happening of some event, for example, the attainment of a specified age or marriage, it is a matter of determining the intention of the truster, and in the rare case where this is not specified in the deed, the normal presumption is that the income should be paid to the minor. If he or she becomes entitled to an absolute interest in income prior to the contingency date, it is not a life interest. Any objection to treatment on the above lines should be referred to WMBC Assets (Edinburgh).
Protective interests
Under Section 33 Trustee Act 1925 and Section 34 Trustee (Northern Ireland) Act 1958, where income is directed to be held on protective trusts for a beneficiary [`the principal beneficiary'] for a particular period, the property is held on the following trusts:
- On trust for the principal beneficiary during that period, but
- If a relevant event occurs, which is usually bankruptcy or an attempt to assign the interest, upon discretionary trusts for the principal beneficiary, spouse, civil partner and issue.
So long as a) applies, it is an interest in possession, but once b) applies it is not, and therefore TCGA92/S72 (1) and TCGA92/S73 could not then apply. This is by way of contrast with the Inheritance Tax provisions in IHTA84/S88, which treats the property as continuing to be held on interest in possession trusts. This is subject to the point that this would only be true from 6 April 2006 if the rules described in CG36525 onwards treated it as subject to the interest in possession provisions previously.
Interest for life of another
Prior to 6 April 1996 the meaning of life interest was slightly modified by TCGA92/S72. See the following paragraphs.
Under old Section 72(3)(a) `life interest' included the right to the income from property, or the use or occupation of the property, for the life of a person other than the person entitled to the right.
For example, where a will or trust deed provided for the income to be paid to A for the life of B, A had a life interest which would terminate on the death of B. See CG36453 for what applies when A or B die.
Trustee’s discretion
Under old Section 72(3)(b) `life interest' did not include any right contingent on the exercise of the discretion of the trustee or some other person. In the light of Pearson v IRC, see CG36320, this provision probably did no more than restate the law. If the trustees can exercise a discretion to take away the interest, because it is a revocable life interest, or because they can defeat the interest by exercising a power of appointment, then it can still be an interest in possession.
But where a will or trust deed provided for the application, in such manner and amount as the trustees may decide, of the income of settled property for the benefit of X for his life with remainder to Y absolutely, the interest of X is not a life interest in the property.
Annuities
TCGA92/S72(3) provides that annuities payable out of settled property are to be treated in the same way as interests in possession.