Life interest trusts and the family home
What is a life interest trust?
In its basic form the life tenant (usually the spouse or partner) is entitled to income produced by the property or, as is more common, to live in the property for the duration of their life. When the surviving spouse dies the capital value is paid to the children or other chosen beneficiaries.
Reasons to consider using a life interest trust
This option is ideal for those wanting to protect and preserve their share in the family home for their children in the event of their spouse remarrying or deciding, at a later stage, to benefit someone who is not their child after they pass away; or where there may be children in the marriage from previous relationships who may need protection.
It is also a general way to ensure protection of ones share in the family home against third parties in general, for example:
Should the surviving spouse become a victim of financial abuse and even fraud
In the event of the surviving spouse’s bankruptcy
The share of the house held in trust would be ‘shielded’ from care fee assessment of the survivor (under current legislation)
This is because the share of the property left on a life interest trust doesn’t strictly belong to the life tenant (even though they are able to live there as normal and can downsize to a different property).
The trust will allow the surviving spouse (i.e.life tenant) to remain in the property/have a home for the rest of their life, and they will also be generally responsible for its upkeep, but the capital is preserved for the children(or other chosen beneficiaries) on the death of the surviving spouse.
If the life interest is given to a spouse, it will not be liable to inheritance tax due to spousal exemption; on the death of the surviving spouse, the Transferable Nil Rate Band allowance can be used up to the current inheritance tax allowance at that particular time and therefore may not be liable for inheritance tax if the estate is within the Nil Rate Band.
However, for an unmarried partner or other individual, there is no spousal exemption and the life interest will be added to the value of their estate for inheritance tax purposes, although they do not actually own it themselves. Similarly it is worth considering tax implications, in terms of the newly introduced Residential Nil Rate Band (RNRB), when leaving the family home to a non-spouse and beneficiaries other than children. Therefore it is particularly important to seek expert estate planning advice when dealing with the family home in your will.
If you have any questions on this topic or anything else relating to your will, please feel free to contact one of our Private Client solicitors for a no-obligation initial consultation.