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Lifetime Trust

Also known as: Inter Vivos Trust, Living Trust

Definition

A lifetime trust (also called an inter vivos trust or living trust) is created during your lifetime, where you transfer legal ownership of assets to trustees who manage them for beneficiaries according to terms in your trust deed.

Unlike trusts created in your will, lifetime trusts commence immediately and often trigger significant inheritance tax consequences, including immediate charges of 20% on values over £325,000.

What Does Lifetime Trust Mean?

A lifetime trust is a legal arrangement where you (the settlor) create a trust while you're alive by transferring assets—such as property, cash, investments, or shares—to trustees who hold legal ownership. The trustees manage these assets for the benefit of chosen beneficiaries according to rules you set out in a trust deed. The term "inter vivos" (Latin for "between the living") distinguishes these trusts from testamentary trusts, which are created in wills and only commence on death.

Under English and Welsh law, lifetime trusts are governed by trust law principles from common law and equity, with trustees' duties defined by the Trustee Act 2000. The Inheritance Tax Act 1984 determines the tax treatment, and since 2020, The Money Laundering Regulations 2017 (as amended) require most lifetime trusts to be registered with HMRC's Trust Registration Service within 90 days of creation. Once you transfer assets to a lifetime trust, you've given away legal ownership—the trustees own the assets, not you, and most lifetime trusts are irrevocable.

The process involves creating a trust deed with a solicitor, transferring assets to appointed trustees, and registering with HMRC. Common types include discretionary trusts (where trustees decide how to distribute assets among beneficiaries), life interest trusts (where one person benefits during their lifetime, then assets pass to others), and bare trusts (where beneficiaries have immediate rights to assets). Critically, the settlor typically cannot benefit from the trust assets due to "gifts with reservation of benefit" rules—if you retain any benefit, HMRC treats the assets as still belonging to you for inheritance tax purposes, defeating the entire purpose.

Most lifetime trusts—particularly discretionary trusts used for inheritance tax planning—are classified as "chargeable lifetime transfers." This means you pay 20% inheritance tax immediately on any amount over £325,000 (the nil rate band). For example, if Emma creates a lifetime discretionary trust with £400,000 in investments, she pays 20% on the £75,000 above the nil rate band, equaling £15,000 immediately. If Emma dies within seven years, this transfer is reassessed at the full 40% death rate (though she gets credit for the £15,000 already paid, and taper relief may reduce charges after three years). Additionally, discretionary trusts face 10-year anniversary charges of up to 6% on values above the nil rate band, plus exit charges when assets leave the trust.

Perhaps most importantly, despite aggressive marketing by some advisers, lifetime trusts generally cannot protect assets from care fee assessments. If you transfer your home to a lifetime trust but continue living there, you've retained a "gift with reservation of benefit"—the property still counts as yours for inheritance tax. More significantly, local authorities can invoke "deliberate deprivation of assets" rules when calculating care costs, with no time limit on how far back they can investigate. Many people create expensive lifetime trusts believing they're protecting assets from care fees, only to discover the strategy fails completely while they've lost control of their assets and incurred substantial legal fees and immediate tax charges.

Common Questions

"What's the difference between a lifetime trust and putting a trust in my will?"

A lifetime trust is created and starts operating while you're alive—you transfer assets to trustees immediately and the trust is active straight away. A trust in your will (testamentary trust) only comes into existence after you die. Lifetime trusts may trigger immediate inheritance tax charges of 20% on values over £325,000, whereas will trusts are assessed as part of your estate on death at 40% if over the threshold. The choice depends on your specific circumstances, but lifetime trusts are generally more complex and should only be used with specialist advice.

"If I put my house in a lifetime trust, can I still live in it?"

This is a critical question and a common trap. If you transfer your house to a lifetime trust but continue living in it rent-free, HMRC treats this as a "gift with reservation of benefit"—meaning you haven't truly given it away. The house will still count as part of your estate for inheritance tax purposes, and local authorities can still assess it for care fee calculations. You would have incurred all the costs and complexity of a trust with none of the intended benefits. Professional advice is essential before considering this.

"How much inheritance tax do I pay when I create a lifetime trust?"

It depends on the value you transfer and the trust type. For most lifetime trusts (discretionary trusts), you pay 20% inheritance tax immediately on any amount over £325,000 (the nil rate band). For example, transferring £500,000 means paying 20% on £175,000 = £35,000 upfront. If you die within seven years, this is recalculated at 40% (with credit for tax paid). Additionally, discretionary trusts face periodic charges of up to 6% every 10 years on values above the nil rate band. The tax implications are complex and require specialist advice.

Common Misconceptions

Myth: "I can put my house in a lifetime trust to protect it from care home fees and still live in it."

Reality: This is one of the most dangerous misconceptions about lifetime trusts. If you transfer your home to a trust but continue living in it rent-free, you've retained a "gift with reservation of benefit" under HMRC rules—meaning the property still counts as yours for inheritance tax. More importantly, local authorities can invoke "deliberate deprivation of assets" rules to still assess the property value when calculating care costs, with no time limit on how far back they can investigate. Some unscrupulous advisers sell lifetime trusts door-to-door as care fee protection, but this strategy often fails completely while costing significant legal fees and triggering immediate inheritance tax charges. Which?, the Law Society, and local authorities have all issued warnings about this misconception.

Myth: "A lifetime trust is a good way to avoid inheritance tax because I can put assets in trust and they're immediately out of my estate."

Reality: This oversimplifies the position and ignores several critical IHT issues. First, most lifetime trusts (particularly discretionary trusts) are "chargeable lifetime transfers" meaning you pay 20% inheritance tax immediately on values over £325,000—not exactly "tax avoidance." Second, if you die within seven years, the transfer is reassessed and may be charged at the full 40% death rate. Third, discretionary trusts face ongoing periodic charges of up to 6% every 10 years. Fourth, if you retain any benefit from the trust assets (for example, living in a property you've transferred), the gifts with reservation of benefit rules mean the assets never left your estate for IHT purposes anyway. Lifetime trusts can form part of legitimate tax planning, but they're complex, costly, and often less tax-efficient than simpler alternatives like making lifetime gifts or using will trusts effectively.

Understanding Lifetime Trust connects to these related concepts:

  • Trust: A trust is the broader category of which lifetime trust is a specific type—understanding fundamental trust concepts (the three-party relationship, legal vs beneficial ownership) is essential before considering lifetime trusts.
  • Will Trust: Will trusts are the contrasting alternative created in your will that only commence on death, avoiding the immediate IHT charge of lifetime trusts but unable to provide lifetime asset management.
  • Settlor: The settlor is the person who creates a lifetime trust, and crucially, settlors usually cannot benefit from their own lifetime trusts or risk losing all IHT advantages.
  • Trustee: Trustees hold legal ownership of lifetime trust assets and manage them according to the trust deed, with significant duties under the Trustee Act 2000.
  • Chargeable Lifetime Transfer: This is the technical inheritance tax treatment that applies to most lifetime trust creations, particularly discretionary trusts, triggering immediate 20% charges on values above the nil rate band.
  • The 7-Year Rule for Inheritance Tax Gifts Explained: When you create a lifetime trust, the transfer is subject to the 7-year rule—if you die within seven years, the value is reassessed at the full 40% death rate, making this article essential for understanding full implications.
  • Estate Planning Checklist: 10 Steps for 2025: This comprehensive checklist helps you understand where lifetime trusts fit within your overall estate planning strategy and whether simpler alternatives would be more suitable for your circumstances.
  • How to Make a Will If You Have Dementia: Lifetime trusts must be created while you have full mental capacity—this article explains capacity requirements and why earlier planning provides more options.
  • Discretionary Trusts in Wills Explained: Understanding discretionary trusts created in wills versus during lifetime helps you choose the right approach, as will trusts avoid the immediate 20% IHT charge that lifetime discretionary trusts trigger.
  • Property Protection Trusts for Homeowners: Essential reading if you're considering putting property into a lifetime trust, particularly if your motivation is protecting it from care fees—this article explains what property trusts can and cannot do.

Need Help with Your Will?

While lifetime trusts have legitimate uses in complex situations, most people achieve better outcomes through a well-drafted will with appropriate trust provisions. This avoids immediate tax charges and maintains flexibility during your lifetime.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete, legally binding will plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer: This glossary entry provides general information about lifetime trusts and does not constitute legal, tax, or financial advice. The rules surrounding lifetime trusts are complex, and the tax treatment depends on your individual circumstances. Lifetime trusts have significant and often irreversible financial and legal consequences. You should always seek advice from a qualified solicitor and tax specialist before creating a lifetime trust. This information is based on UK law in England and Wales as of October 2025 and is subject to change.