Understanding Life Interest Trusts

A life interest trust gives one person the right to benefit from an asset for the rest of their life, to live in a property, or to receive the income from investments, while the capital is preserved for someone else to inherit afterwards. The person with the lifetime benefit is called the life tenant, and those who inherit the capital later are the remaindermen. It is one of the most widely used trusts in will planning.

How does a life interest trust work?

Assets are placed in trust, and the trustees hold them for the benefit of the life tenant during their lifetime. The life tenant can usually live in a property or receive the income from the trust assets, but cannot spend the underlying capital. When the life tenant dies, the trust ends and the capital passes to the remaindermen named in the trust.

What is a common example?

A frequent use is in second-marriage or blended-family situations. Someone may want their surviving spouse or partner to be able to live in the family home for the rest of their life, but ultimately wants the property to pass to their own children from an earlier relationship. A life interest trust achieves both: the survivor is secure in the home, and the children’s inheritance is protected.

Why use a life interest trust?

The main benefits include:

• Providing security for a surviving partner while protecting capital for children
• Ring-fencing a share of the home, which can help where care fees are a concern
• Keeping control over who ultimately inherits, rather than leaving it to chance

You can read about other options on our trusts page.

How is a life interest trust taxed?

The tax treatment depends on how and when the trust is created. A life interest trust created by a will on death (an immediate post-death interest) is generally treated as part of the life tenant’s estate for inheritance tax when they die. Trusts created during your lifetime are usually taxed under the separate “relevant property” regime, with possible entry, ten-yearly and exit charges. Because thresholds such as the nil-rate band (£325,000) are frozen and reliefs are changing, it is important to take current advice.

Does it affect the residence nil-rate band?

It can. The residence nil-rate band (£175,000 per person) is an extra inheritance tax allowance available when a home passes to direct descendants. Some trusts qualify and some do not, so the way a life interest trust is structured can affect whether this valuable allowance is available. This is a key reason to get the drafting right.

Getting advice

Life interest trusts are flexible but technical, and small drafting differences can have large consequences. We can advise whether one suits your circumstances and prepare it correctly within your will. See our wills, trusts and estates service, or request a callback.