An interest in possession trust splits the benefit of an asset between someone entitled to the income now and someone entitled to the capital later. This guide explains how the life tenant and remainderman roles work, how income and Inheritance Tax apply, and how it compares with a discretionary trust.
What an Interest in Possession Trust Is
An interest in possession trust separates the right to income from the right to capital. One beneficiary, the life tenant, has an immediate and automatic entitlement to the income the trust assets generate, while the capital itself is preserved within the trust for another beneficiary, the remainderman, who typically only becomes entitled to it once the life tenant's interest ends.
Life Tenant and Remainderman
The life tenant receives income as it arises -- rent from a trust-owned property, or dividends from trust-held shares, for example -- but has no automatic right to the underlying capital itself. The remainderman's interest is in the capital, which they become entitled to once the life tenant's interest ends, most commonly on the life tenant's death, though a trust deed can set other conditions.
How Income Tax Applies
Income arising within the trust is generally taxed and then treated, for the life tenant's own tax return, broadly as if they had received it directly, with credit given for tax the trustees have already paid. This means the life tenant's personal tax position -- their other income, reliefs and allowances -- affects the overall tax outcome, not just the trust's own rate of tax.
Inheritance Tax Treatment
This is one of the more complex areas of trust taxation and depends heavily on when and how the trust was set up. Certain trusts created on death -- often called immediate post-death interest trusts -- are typically treated as forming part of the life tenant's own estate for Inheritance Tax. Many interest in possession trusts created during someone's lifetime since 2006, by contrast, generally fall within the separate relevant property trust regime, with its own periodic and exit charges rather than being folded into the life tenant's estate. Given how much the answer depends on the specific facts, professional advice is essential before relying on any general assumption.
Compared with a Discretionary Trust
The key difference is certainty. An interest in possession trust gives the life tenant a fixed, automatic right to income, leaving trustees little discretion over who receives it. A discretionary trust instead gives trustees the power to decide which beneficiaries, among a defined class, receive income or capital and how much, with no beneficiary having an automatic entitlement until the trustees choose to make a distribution -- offering more flexibility but less certainty for any individual beneficiary.
Frequently Asked Questions
What is an interest in possession trust?
An interest in possession trust gives one beneficiary, called the life tenant, an immediate and automatic right to the income the trust assets produce (such as rent or dividends), while the underlying capital is preserved for one or more other beneficiaries, called the remaindermen, who become entitled to it later, often on the life tenant's death.
What is a life tenant entitled to?
A life tenant is entitled to the income generated by the trust as it arises -- for example, rental income from a trust-owned property, or dividends from trust-held shares -- but is not automatically entitled to the underlying capital itself, which is held for the remainderman.
Who is the remainderman and what do they get?
The remainderman (or remaindermen) is the beneficiary entitled to the trust capital once the interest in possession ends -- most commonly on the death of the life tenant, though a trust deed can specify other trigger events. Until that point, the remainderman generally has no right to income or to demand capital.
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How is trust income taxed?
Income arising in an interest in possession trust is generally taxed at basic rates within the trust and then treated as the life tenant's own income for their personal tax return, meaning the life tenant is usually taxed (with credit for tax already paid by the trustees) as if they had received the income directly.
How does Inheritance Tax apply to an interest in possession trust?
The Inheritance Tax treatment depends heavily on when and how the trust was created -- older "immediate post-death interest" trusts set up on death are typically treated as part of the life tenant's own estate for IHT purposes, while many lifetime interest in possession trusts created since 2006 instead fall within the separate "relevant property" trust charging regime with its own periodic and exit charges. Because this area is genuinely complex and depends on specific facts, professional advice is essential.
How does an interest in possession trust differ from a discretionary trust?
In an interest in possession trust, one beneficiary has an automatic, fixed right to the income as it arises. In a discretionary trust, the trustees decide who among a class of potential beneficiaries receives income or capital, and how much, with no beneficiary having an automatic right to anything until the trustees decide to make a distribution.
Why would someone set up an interest in possession trust?
A common use is providing for a surviving spouse or partner to have the income from an estate (such as rental income from the family home) for their lifetime, while ultimately preserving the capital for children from an earlier relationship -- balancing support for the survivor against protecting the eventual inheritance for the children.
Can the life tenant sell the trust assets themselves?
No. The trustees, not the life tenant, legally own and control the trust assets and make decisions about selling or reinvesting them, though the trust deed and general trustee duties usually require trustees to balance the life tenant's need for income against the remainderman's interest in preserving capital value.
Do I need a solicitor to set up an interest in possession trust?
Given the complexity of the tax rules and the importance of the trust deed correctly reflecting the family's wishes, professional advice from a solicitor experienced in trusts and estate planning, alongside a tax adviser, is strongly recommended rather than attempting to set one up without expert help.
What happens when the interest in possession ends?
When the life tenant's interest ends -- most commonly on their death, but sometimes earlier if the trust deed allows it to be brought to an end or the life tenant assigns their interest away -- the remainderman typically becomes entitled to the capital outright, or the trust may continue in a different form, depending on what the trust deed provides.
Disclaimer: This guide reflects interest in possession trust rules as understood in 2026/27; trust taxation is highly fact-specific. This guide is for general information only and is not professional advice. Consult a qualified adviser and refer to gov.uk for current official guidance before relying on any treatment.
