What is an interest in possession trust?
Answered 17 March 2026
What is an Interest in Possession Trust?
What the law says
There is no statutory definition of "interest in possession". However, the meaning was clarified by the House of Lords in Pearson v IRC [1981] AC 753.
HMRC guidance / practice
Definition
An interest in possession (IIP) trust is a trust where the trustees must pass on all trust income to the beneficiary as it arises (less any expenses), or where the beneficiary has a right to use the trust property (for example, to occupy a house).
More precisely, HMRC's position (per a Board's Press Notice of 12 February 1976) is that an interest in possession exists where the person having the interest has the immediate entitlement (subject to any prior claims by the trustees for expenses or other outgoings properly payable out of income) to any income produced, as the income arises.
Key terminology
- The beneficiary is referred to as having an "interest in possession" in the income or property of the trust.
- Where the interest lasts for the beneficiary's lifetime, they are called the "life tenant" and the trust may be called a "life interest trust". IIP trusts are also sometimes referred to as "non-discretionary" trusts.
- In Scotland, the equivalent terms are "liferenter/liferentrix" and "liferent trust".
Common uses
IIP trusts are often created by the terms of a will, giving an individual (e.g. a surviving spouse or civil partner) the right to benefit from the deceased's assets for their lifetime, with the assets then passing to a different individual under the will.
Inheritance Tax treatment
Where an interest in possession subsists, the settled property is treated as forming part of the beneficiary's estate and is taxed on death or during their lifetime as if they owned the property in their own name.
However, following Finance Act 2006 (from 22 March 2006), only three types of new qualifying interest in possession exist for IHT purposes. All other IIP trusts created after that date are treated as "relevant property" trusts and subject to the discretionary trust charging regime, unless they qualify as a trust for bereaved minors or an age 18-to-25 trust.
Income Tax treatment
The IIP beneficiary is taxable on the trust income after allowable trust management expenses.
Citation sources
For Inheritance Tax purposes there is an important distinction between: settlements in which there is a qualifying interest in possession (IHTM16062) and settlements in which there is no qualifying interest in possession. Normally, the interests of the beneficiaries under these two types of settlements are taxed under different provisions of the IHTA84. From 22 March 2006 onwards, following changes in the Finance Act 2006, there can be only three types of new qualifying interest in possession (I
An interest in possession trust is a trust where the trustees must pass on all trust income to the beneficiary as it arises (less any expenses), or where the beneficiary has a right to use the trust property (for example, to occupy a house). The beneficiary is referred to as having an ‘interest in possession’ in the income of the trust or in the trust property. In some cases, the beneficiary has the interest in possession for a fixed period, but usually the beneficiary has the life interest for
There is no statutory definition of ‘interest in possession’. A Board’s Press Notice dated 12 February 1976 indicates that an interest in possession ‘exists’ where the person having the interest has the immediate entitlement (subject to any prior claims by the trustees for expenses or other outgoings properly payable out of income) to any income produced…as the income arises….’ See CG36320 for a more detailed explanation. Sometimes we refer to interest in possession trusts as ‘non-discretionary