An interest in possession trust is a form of legal arrangement which gives a person a “present right to the present enjoyment of something”. At least one of the beneficiaries of this type of trust will have the right to receive the income generated by the trust (if trust funds are invested) or the right to enjoy the trust assets for the present time in another way, for example by living in a property owned by the trustees. The beneficiary with the right to enjoy the trust property for the time being is said to have an interest in possession and is colloquially described (though not always strictly accurately) as an income beneficiary.
A trust can give the interest in possession to a beneficiary for a fixed period, for an indefinite period or, more usually, for the rest of the beneficiary’s life. Such a life interest trust is the most common example of aninterest in possession trust.
In the example of a life interest trust, the interest in possession ends when the income beneficiary, also called the life tenant, dies. The capital of the trust will then pass to another beneficiary (or more than one). Where a charity has the right to income under a trust, it will also have an interest in possession, but this will clearly not be a life interest trust – an example would be a trust under which an art gallery has the right to display works owned by the trustees for a certain period.
Either the will or trust deed establishing the trust, or the general law, will set out how tax and trustees’ expenses will be divided between the income beneficiary and the capital of the trust. Trustee investment policies will also allow emphasis on either present income (which may reduce the real value of the capital) or capital growth (increasing income in the long term and capital remaining when the interest in possession is terminated) or a balance.
Interest in possession trusts are often created as part of a will. Typically, a surviving spouse will be granted a right to the income of the trust by the settlor. When the surviving spouse dies, the rest of the fund (theremainder) may pass to the couple’s children or other named persons.