Life Interest Trusts

Also known as an interest in possession trust

What is a life interest trust?

It is a trust that is established to provide the beneficiary with (who is known as the ‘life tenant’) the right to receive the income (after expenses) from the trust.  This right is usually given for their lifetime.  On their death the trust fund passes the other named beneficiaries, known as the ‘residuary beneficiaries’. 

The life tenant does not have any right to the capital, unless expressly given in the trust deed.

If there is a property held in the trust the life tenant is entitled to either receive the rental income from it or to live in the property if they wish.
A life interest trust can be established either in your lifetime or by your Will.

Why would this type of trust be used?

Here are a few typical examples:

  • Unsure as to what the future may hold?  Concerns that your spouse could remarry after your death and their new family would inherit your assets
  • Second marriages and step-children.  This type of trust allows you to provide for your new spouse but ultimately your assets pass to your own children
  • Concerns regarding care fees in the future.  This allows you to ring-fence your assets, to ensure that your children will receive some inheritance in due course
  • Keeping the family business in the family.  Shares could be held in the trust

What assets could the trust hold?

The trust can hold most assets; typically it is cash, investments or property.

If establishing a trust in your lifetime cash is often transferred in due to tax considerations.

If done by a Will, it is typically your entire estate or your share of the family home.

If a share of the family home is held within the trust, this does not prevent the life tenant moving home with the trustees’ permission.

They would however have to seek the trustees’ permission before the property could be sold and a new one purchased.

Who should be a trustee?

Care should always be given when deciding whom to appoint.  It is often the surviving spouse and the children.  However, if there is any family conflict or potential for conflict, it is our advice to appoint independent trustees, who could be a friend, family member or a professional trustee.

A maximum four trustees are permitted and we would recommend that a minimum of two are appointed.

Tax treatment

The trustees are responsible for declaring and paying income tax and capital gains tax.

The income received belongs to the life tenant and is taxed at their personal income tax rate.

For capital gains tax, the trust is taxed.  The trust will have an annual allowance to offset against the gain.

If the life tenant lives in the trust property as their principal private residence and that property is sold, it is not subject to capital gains tax.

For inheritance tax purposes, the trust will be treated differently depending on whether it was established in your lifetime or by your Will.

If in your lifetime, inheritance tax may be due when:

  • On each ten year anniversary of the Trust
  • When assets are put into the trust
  • When assets are transferred out

If by your Will and it is an immediate post-death trust:

  • The spouse exemption is available if the life tenant is the surviving spouse; there is no tax to pay when established.  Otherwise inheritance tax is paid within the estate
  • It is treated as part of the life tenant’s estate.  If the combined trust value and the estate value is over the available nil rate band (this is the amount of the estate that is taxed at zero percent) inheritance tax will be paid at that point

How can Greenwoods help?

The Private Client Team at Greenwoods will be able to advise you as to whether this trust is suitable for your circumstances and will explain fully all of the options available to you.

We are experienced in working in the role of a professional trustee or working behind the scenes advising the trustees as and when necessary.

The Private Client Team can be reached on 01733 887700