It is becoming increasingly common that, with the increase of second marriages and the increase in costs for care home fees that couples may want to protect their assets as much as possible. A life interest trust may be appropriate to help protect assets in certain situations, in this article I will consider how life interest property trusts can be utilised in Wills.
What is a Life Interest Property Trust?
A life property interest trust gives a particular beneficiary (the life tenant) the legal right to receive the income from, or to use or occupy a property comprised within the trust. The beneficiary is known as the life tenant because the rights normally last throughout the beneficiary’s life time. There are certain circumstances in which the trust may come to an end and this might be if the life tenant remarries, dies, or decides to end the trust during their life time.
The trust must specify what would happen to the property/assets in the trust on the life tenant’s death or the ending of the trust.
The person creating the trust may want to consider who they would like to act as trustees in relation to the trust. The trustees would need to safeguard the trust assets and must always act in the best interests of the beneficiary.
A Life Interest Property Trust Example
One couple is on their second marriage and the husband has children from his first marriage. The couple are currently living in a property which is owned by both of them as tenants in common. The husband would like to ultimately benefit his children but does not want his wife to move out of the family home on his death (if he dies first). A Life Interest Trust would allow the husband to leave his share of the property in trust to allow his wife to remain in the property for the remainder of her lifetime and on her death (or other reason for the trust coming to an end) the husband’s half share of the property would be inherited by his children.
Tax Implications
Inheritance Tax
If the life interest property trust has been created on or after 22 March 2006, the whole capital value of the trust assets is treated for inheritance tax purposes as being comprised in the life tenant’s estate. This means that the executors for the life tenant’s estate will need to include the value of the trust when completing any inheritance tax forms. This, therefore, means that inheritance tax will be payable on both the trust assets and the assets in the life tenant’s own estate.
However, the trustees of the life interest property trust will be responsible for paying out of the trust assets the proportion of the inheritance tax payable in relation to the trust.
Income Tax
It is possible that income tax may be payable on any capital investment during the life time of the trust. If this is the case, the trustees would need to complete tax returns.
If you would like to consider including a life interest trust in your Will, please contact the private client department on 01189 589 711 or email info@barrettandco.co.uk.
