Definition
A Life Interest Trust is a trust that allows someone (the life tenant) to use or benefit from assets during their lifetime, while preserving those assets for others (the remaindermen) to inherit after the life tenant dies.
This trust structure is particularly valuable for second marriages and blended families, where you want to provide for your current partner while ensuring your children ultimately inherit your estate.
What Does Life Interest Trust Mean?
A Life Interest Trust is a type of interest in possession trust where the trustees must pass all trust income to a beneficiary as it arises, or grant them the right to use trust property (such as living in a house). According to HMRC guidance (TSEM1564), the person with this right—the life tenant—has immediate entitlement to income or use of the property, but not to the capital itself. The people who ultimately inherit the assets after the life tenant dies are called remaindermen. The trust owns the assets legally; the life tenant simply has beneficial use rights for their lifetime.
Most Life Interest Trusts are created through wills (testamentary trusts), though they can be established during your lifetime. This structure is particularly common when someone in a second marriage wants to ensure their surviving spouse can continue living in the family home, while guaranteeing their children from a previous relationship eventually inherit their share of the property. The critical requirement is that property must be owned as tenants in common, not joint tenants—joint tenancy property passes automatically to the survivor regardless of will provisions, completely bypassing the trust.
David, 68, is in his second marriage to Emma, 64. He has two adult children from his first marriage and owns a 50% share of the family home worth £560,000 as tenants in common. In his will, David places his £280,000 share into a Life Interest Trust. When David dies, Emma can continue living in the house for her lifetime (she's the life tenant), but when Emma dies, David's £280,000 share passes to his children (the remaindermen), not to Emma's relatives or any future spouse. Emma benefits from the property but cannot sell it or change who ultimately inherits it.
For the trust to work properly, trustees hold legal title and manage the trust on behalf of both the life tenant and remaindermen. The life tenant cannot sell, mortgage, or give away the assets—their rights are limited to use or income. Flexible Life Interest Trusts (FLITs) give trustees discretionary power to advance capital to the life tenant in certain circumstances, providing some flexibility while maintaining the basic protective structure. Trusts must be registered with HMRC's Trust Registration Service if they continue beyond two years from the date of death.
Life Interest Trusts have significant tax implications. For inheritance tax purposes, HMRC treats the life tenant as owning the assets—the trust property is included in their estate when they die. This doesn't necessarily mean tax is payable (it depends on the total estate value and available nil rate bands), but it's a crucial distinction from the common misconception that trust assets are "outside" the estate for tax purposes. The legal ownership (trust) and tax treatment (life tenant) are deliberately split.
These trusts can provide some protection from care home fee assessments because the life tenant doesn't legally own the trust assets—only their own share of jointly owned property is counted in means testing. However, you cannot create a Life Interest Trust solely to avoid care fees. That constitutes "deliberate deprivation of assets," which local authorities can investigate with no time limit. Unlike the seven-year rule for inheritance tax gifts, there's no safe harbor period for care fee planning. You need legitimate estate planning reasons, such as protecting children's inheritance in a blended family, for the trust to withstand scrutiny.
Life Interest Trusts are not suitable for everyone. They add complexity and ongoing administration costs (trustee duties, potential tax returns, registration requirements) compared to leaving assets outright. They can restrict the surviving partner's financial flexibility by denying access to capital. For younger couples or simple estates, outright gifts or discretionary trusts may be more appropriate. The key distinction from discretionary trusts is that trustees have no discretion over income distribution—the life tenant has an automatic legal right to receive all trust income.
Common Questions
"Can my husband still live in our house if I put it in a Life Interest Trust for my children?" Yes, absolutely. If you name your husband as the life tenant in your will, he has the legal right to continue living in the house for the rest of his life. However, the property must be owned as tenants in common (not joint tenants) for the trust to work. When your husband passes away, your share goes to your children as you intended.
"Will a Life Interest Trust protect my assets from care home fees?" Partially, but with important limitations. If you die and your share goes into a Life Interest Trust, that share is not counted as part of the life tenant's assets during care fee assessments. However, you cannot create this trust solely to avoid care fees—that's "deliberate deprivation of assets" and councils can ignore it. There must be legitimate estate planning reasons, such as providing for children from a previous marriage.
"What's the difference between a Life Interest Trust and leaving everything to my spouse outright?" With an outright gift, your spouse owns the assets completely and can do whatever they want—sell them, give them away, or leave them to anyone in their will. With a Life Interest Trust, your spouse can use the assets (like living in a house or receiving rental income) but cannot change who ultimately inherits them. This protects your children's inheritance while still providing for your spouse.
Common Misconceptions
Myth: "The life tenant owns the assets in a Life Interest Trust."
Reality: The life tenant does NOT own the assets—the trust owns them. The life tenant only has the right to use the property or receive income from it. This is a critical legal distinction that affects inheritance tax treatment, care fee assessments, and what happens if the life tenant remarries or wants to sell. For inheritance tax purposes, HMRC treats the life tenant as if they own the asset (it's included in their estate), but they don't have legal ownership rights. The legal and beneficial ownership are split.
Myth: "I can create a Life Interest Trust in my will to avoid care home fees for my spouse."
Reality: While a Life Interest Trust can provide some protection from care fee assessments (because the trust owns the assets, not the life tenant), you cannot create one solely for this purpose. Local authorities can investigate "deliberate deprivation of assets" going back unlimited years—there's no seven-year rule for care fees. You need legitimate estate planning reasons, such as protecting your children's inheritance in a blended family. The seven-year rule applies only to inheritance tax on gifts, not to care fee assessments.
Related Terms
Understanding Life Interest Trust connects to these related concepts:
- Trust: Life Interest Trust is a specific type of trust with defined rights for beneficiaries
- Trustee: Trustees manage the Life Interest Trust and balance duties to both life tenant and remaindermen
- Discretionary Trust: Unlike Life Interest Trusts where trustees must distribute income to the life tenant, discretionary trusts give trustees full discretion over distributions
- Blended Family: The primary family situation where Life Interest Trusts provide the fairest solution for competing inheritance interests
Related Articles
- Estate Planning for Second Marriages: Explores how Life Interest Trusts solve the common dilemma of providing for a current spouse while protecting children's inheritance
- Understanding Different Trust Types: Compares Life Interest Trusts with discretionary trusts and protective trusts to help determine which structure fits your circumstances
- Protecting Family Property: Details how Life Interest Trusts safeguard family homes and property portfolios for ultimate beneficiaries while allowing lifetime use
- Pre-Retirement Estate Planning: Covers how to structure assets approaching retirement to provide for a surviving spouse while preserving wealth for the next generation
Need Help with Your Will?
Life Interest Trusts are complex legal structures requiring careful drafting and proper setup. If you're considering this option for your blended family or estate planning needs, you need professional legal advice to ensure the trust works correctly.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. Life Interest Trusts have complex inheritance tax, income tax, and capital gains tax implications. For advice specific to your situation, consult a qualified solicitor specializing in trusts and estate planning.