Life Interest Trusts
A Life Interest Trust (also called an Interest in Possession Trust) is one where a specified beneficiary (or more than one) is 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 the beneficiary 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. This beneficiary is known as the Life Tenant. The Life Tenant is not entitled to receive any of the capital from the Trust.
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 will then receive the assets held by the Trust. The Trust may, however, continue if these beneficiaries are under the age at which you would like them to inherit.
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.
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 offset the gain. There is no tax payable on a property lived in by 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 can not 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 times but that on their deaths the property passes back to the children from the first relationship. There are many uses for Life Interest Trusts and if you would like to discuss them further please do not hesitate to contact us.
If you would like any further information please contact Penny Brice at any of our offices