A “life interest” trust, is also known as an “interest in possession trust” and some solicitors refer to it as a “property protection trust” – it is designed to shield a share of the property from long-term care fees.
In this type of trust, the half share of the family home belonging to the first person to die passes into the trust as set out in a will.
A life interest trust gives the survivor the right to live in the property for the rest of his or her life , they are known as the life tenant. If the survivor requires long-term care, the share of the property held in trust cannot be assessed as capital available to pay care fees, and so is shielded for children to ultimately inherit.
The couple must make sure the family home is owned as “tenants in common”. This means a share in a property is passed on according to the deceased’s will, rather than passing automatically to the surviving joint owner or owners whether it is the spouse or not as sometimes the property is not owned jointly with a spouse. The trustees control the trust. These will usually be the surviving partner and at least one other person, but the survivor’s right of occupation is protected.
When both parties die, i.e. when the life tenant dies the trust ends and the share of the property held in trust passes to the children or whoever is named in the will that is to receive after the life tenant dies. These beneficiaries are called remainder-men.
A Life Tenant under this type of trust is also entitled to the income from assets held in trust for their life time. If the asset in trust is a house or other property then he or she is entitled either to the rental income if the property is rented out or they have the right to live in the property if they wish. The Life Tenant is not entitled to receive any of the capital from the Trust.
These beneficiaries/ remainder-men do not receive anything from the trust whilst the Life Tenant is alive unless the Life Tenant agrees. In addition to the basic form of Trust you can be more detailed in how you would like the trust to work, for example: 1. If you would like to you can give the Trustees of a Life Interest Trust the power to either give capital or lend it to the Life Tenant, and this would be at the discretion of the Trustees you have chosen. 2. Where there is a property you can specify that if the life tenant wishes to move that they have the power to require the Trustees to sell the Property and purchase another for the life Tenant to live in. 3. You can specify how you would like the Trustees to invest any money held by the Trust. When the Life Tenant dies the Trust usually comes to an end and the Residuary Beneficiaries or remainder-men will then receive the assets held by the Trust.
The Trust may, however, continue if these beneficiaries /remainder-men are under the age at which you would like them to inherit. Inheritance Tax For Inheritance tax purposes the Life Tenant is treated as owning all of the assets in the Trust as so if the Life Tenants own assets which together with the value in the Trust exceed the IHT threshold (currently £325,000) then Inheritance tax will be payable on the assets held in the Trust. Life Interest Trusts do not have any Inheritance Tax advantages. Income Tax All income from the Trust belongs to the Life Tenant and will be taxed at their own income tax rate. The Trust will not pay any additional income tax.
Capital Gains Tax – If the assets held by the Trust increase in value then capital gains tax may be payable at a rate of 28% on the increase when sold. The Trust will have an annual allowance (currently £5050) which can be used to off‑set the gain. There is no tax payable on a property lived in by the Life Tenant. For most people a Life Interest Trust is useful in that it protects the assets in the trust from being used during the Life Tenants Lifetime. Therefore, for example if the Life Tenant goes into a nursing home the Local Authority cannot take the assets in the Trust to pay for their care. Where people have children from a previous relationship a Life Interest Trust can be useful to ensure that the second spouse has the right to live in the property for their life but that on their deaths the property passes back to the children from their previous relationship. There are many uses for Life Interest Trust