A life interest trust allows a person (the ‘settlor’) to set up a trust by putting something (usually a share in a property) in trust for the ‘life tenant’ (usually their partner). The life tenant can benefit from it during their lifetime without legally owning it but the settlor leaves it to the ‘ultimate beneficiary’ (usually their children) in the end and names people to manage the trust (the ‘trustees’).
Perhaps you want your partner to be able to live in your property after you die but you don’t want to leave them your property because if they go into care, the whole value of it may be used for their care fees? Then a life interest trust in your will would be a good option.
Does how you own the property determine if you can include a life interest trust in your will?
Yes. In order to have a life interest trust in your will, you must either own the property in your sole name or own the property as tenants in common with one or more other persons. Most married couples own their family home as joint tenants and if this is the case, the way you own it must also be amended.
What if I own my property as Joint tenants with another person?
If you would like to include a life interest trust in your will, you must sever the joint tenancy to own the property as tenants in common.
Joint tenants = if one of you dies, the survivor automatically becomes the sole owner of the property, no matter what it says in your will.
Tenants in common = you both own a definitive share of your property and can leave it to whoever you like in your will.
How many executors should you appoint when including a life interest trust in your will?
You should have at least two executors in your will when including a life interest trust (who would also act as trustees of the trust, or you can appoint different trustees to your executors).
When does a life interest trust end?
A life interest trust generally ends when the beneficiary:
- Goes into care
- Decides not to live in the property for a certain period
- Does not keep the property in good repair/condition
- If the life tenant co-habits or remarries
How do inheritance tax & life interest trusts interact?
With a life interest trust, there are two elements – capital and income. As the trust asset of most life interest trusts is made up of the deceased’s share of a married couple’s* family home, it is usually the surviving spouse who is the ‘life tenant’ and entitled to the income (of which there would be none if they lived in the property – but if they moved out and the property was rented to make money for their care fees, for example, the income would be the rent). When the life tenant’s interest ends, say they die, the capital passes to the ultimate beneficiaries (normally the children).
If the life tenant is the deceased’s spouse, the spouse exemption applies and the value of the asset is not subject to inheritance tax on the first death.
HMRC considers the life tenant owns the trust asset in terms of inheritance tax. When the life tenant dies, the trust asset is considered part of the life tenant’s estate and taxed as such.
If the life interest trust ends while the life tenant is still alive, e.g. the house is sold to fund the life tenant’s care fees and the proceeds of sale of the half belonging to the trust are split between the ultimate beneficiaries and not kept in trust, the life tenant is considered to be gifting this to the ultimate beneficiaries. If the ultimate beneficiaries are not exempt (like a charity would be) or the proceeds pass into another trust, this could result in inheritance tax implications (for instance, reducing the life tenant’s inheritance tax Nil Rate Band of £325,000 by the value of the gift, if they die within seven years of making the gift on a sliding scale).
The Nil Rate Band of £325,000 is the amount your estate can be valued at before inheritance tax is payable at 40% of anything above that. If you leave your family home to your direct descendants (children or grandchildren), you also get a Residence Nil Rate Band of £175,000. And if you are married or in a civil partnership and leave everything (including your family home) to your spouse on the first death, and your children on the second death, the estate of the second to die could be worth up to £1,000,000 before inheritance tax is payable because Nil Rate Bands and Residence Nil Rate Bands are transferrable between spouses: £1,000,000 = (2 x £325,000) + (2 x £175,000).
If gifting the proceeds of sale to the ultimate beneficiaries while the life tenant is still alive could have a negative impact on the life tenant’s Nil Rate Band when they die by reducing it, the trustees of the life interest trust may want to consider keeping the proceeds of sale as a trust asset and distributing the trust assets to the ultimate beneficiaries only after the life tenant has died.
*References to marriage or spouse refer to civil partnership or civil partner interchangeably.
This could be you – Mr and Mrs Green
Consider the following example of a common family scenario:
- Mr and Mrs Green are married with two children
- They are both in their 70s
- They own their family home as joint tenants
- It is worth £200,000 and the mortgage is paid off
- They have £50,000 in savings in a joint account
- In their wills, they leave everything to each other on the first death and to their children on the second death
- Mr Green passes away
Example of how a life interest trust could protect your assets from care home fees
A year later, Mrs Green moves into a care home. At that point, the local authority does a financial assessment of her, which includes the total value of the family home as one of her assets. They deem her responsible for all her own care home fees, as her assets are above £23,250 (based on current rules). After her savings have been spent on care fees, the family home must be sold to fund her care. If the cost of the care home is £52,000 per year then after not even four years, the full value of the property would have been used up and the children’s inheritance would have been significantly depleted.
NB: once your assets go below £23,250, the local authority begins to pay for some of your care. Once they go below £16,500, the local authority pays for all of your care. Now consider that a care home rated good by the CQC could be £1,000 per week and the local authority rate is normally about £500 per week. If you are in a care home where the weekly fee is higher than the local authority rate, your family may be asked to pay a top-up fee or you may have to move into a cheaper home.
If Mr and Mrs Green had severed their joint tenancy to become tenants in common and had made wills where they left their share of the property in a life interest trust whoever died first, the trust could have ended when Mrs Green went into care.
If Mr Green’s will said that when the trust ended, his share of the property went to his children, this would mean when the property was sold, Mrs Green got half the proceeds and the children could have the other half. In this way, half the value of the family home has been protected from being spent on care fees.
Example of how a life interest trust could prevent your loved ones being disinherited
If, after Mr Green died and during Mrs Green’s lifetime, she does any of the following (the list is not exclusive) then their children would not benefit from the property or its value at all:
- She re-marries and does not write another will (new spouse automatically inherits all or a large part of the estate)
- She makes another will disinheriting the children or reducing the inheritance to the children and including other people (perhaps due to a family disagreement)
- She goes into care (as in the above example)
- She sells the property and spends the money
If Mr Green had left his share of the property in a life interest trust, he could have ensured that their children got at least half the value of the property eventually.
Children from previous relationships (stepchildren and blended families)
If you have (re)married and have children from previous relationships, you may also want to consider a life interest trust to benefit them. It may be the case that both spouses are in this position. Even if you have children together too, you may want to make sure that if you die first, the children you do not share biologically are not disinherited.
NB: timescales and fees are subject to change – please ask for details.
Yes, this is possible. If the property is jointly owned by you and your spouse, it is essential that the property is held as tenants in common, rather than joint tenants. It is possible for you to leave your spouse a life interest in your half of the property and if your spouse goes into a care home after you die, only half the value of the house is taken into consideration by the local authority when carrying out a financial assessment to see if they had to pay for their own care. It is essential that the life interest trust is properly worded in the will and you should ensure that you consult a specialist solicitor.