Life Interest Trusts

Interest in possession trusts, also known as life interest trusts, are a common form of trust and can be created either under your Will or as a lifetime trust.  This type of trust gives the beneficiary an immediate right to any income earned in the trust.  If the asset within the trust is a property it can also provide the beneficiary with the right to live in that property for their lifetime.

Interest in possession trusts are a valuable planning tool and are usually used in order to protect capital.  They can be useful when considering planning for long term care and also when considering a second marriage scenario.

As mentioned these types of trusts can be created under your Will.  They will usually, although not always, be used to give the surviving spouse a right to live in the family home for the rest of their lifetime.  The surviving spouse is called a life tenant in trust terminology.  On the survivors death the underlying asset in the trust will pass to the children, or any other beneficiary stated.  This ensures that if the survivor does re-marry that the deceased’s share of the property passes to the children.  It can also be useful where both spouses have children from previous relationships.  It ensures that each spouse is able to pass their share of their property to their respective children, whilst ensuring that the survivor has the right to live in that property for the rest of their days.

These trusts can also be created during a person’s lifetime.  It is important that the person creating the trust (in trust terminology called the settlor) takes advice at the time of creating the trust as there can be tax consequences of placing assets into such a trust.  Passing assets into the trust is usually a potentially exempt transfer (PET) for an individual, so if the settlor survives the gift by 7 years no inheritance tax is chargeable on the transfer.   There may however be Capital Gains Tax consequences of such a transfer.

Any income earned in this type of trust will belong to the life tenant and it is important that they disclose such income on their tax returns.

There can also be tax consequences on the death of the life tenant.  For example the value of the assets in the trust must be declared as part of the estate of the life tenant for inheritance tax purposes.