Lifetime Interest Trust in the United Kingdom

Lifetime Interest Trust

Lifetime Interest Trust in the United Kingdom

There is a misconception that trusts can only be used by wealthy people that are looking to protect multiple assets or even overseas property. However, anybody can draw up a lifetime interest trust as part of your will to protect your assets. The benefit of a lifetime interest trust is that it is applicable before death, whilst other forms of trust only take effect after a person has died.


A lifetime interest trust allows you to set aside some of your assets that can be used for your care or someone else’s care later in life, as a gift, as well as reducing the amount of inheritance tax that has to be paid on your estate after your death. But it must be remembered that once your assets become part of a trust, they are then owned by the trust and not you. Let’s look at lifetime interest trusts in more detail and how they can be used.


What is a lifetime interest trust?


It is a type of trust that is included with your will and allows you to state who will own the rights to your home, and other assets, upon your death. They are typically flexible, and any beneficiaries named in a trust have the right to receive income from the property or assets named in the trust. For example, you could name a relative or spouse in the trust so that should they need long-term care in the future, the income from the trust will pay for it.


Also known as ‘interest in possession’ trusts, putting your more valuable assets into a trust, such as property, jewellery or artwork, helps to protect your family and beneficiaries from paying high levels of inheritance tax upon your death. For example, in most cases, your assets will automatically pass to your spouse when you die. However, a lifetime interest trust can be set up in advance, which means your spouse, or another beneficiary will receive an income from the trust for the duration of their lifetime. When they die, the trust is then transferred to their beneficiaries, usually children, and there will be no inheritance tax to pay. This is because, in most cases, any funds (assets) within the trust are not part of any financial assessment of your estate.


In addition, should your surviving spouse require long-term medical care, any funds in the trust are not part of the financial assessment for the cost of the care.


When can a lifetime interest trust be used?


A lifetime interest trust is most suitable for couples, whether it is a civil partnership or marriage if they want:


  • To preserve their assets for their beneficiaries, such as children, but also want the life tenant (the surviving spouse) to live in the family home.
  • To make a trust to reduce the burden of inheritance tax.
  • To ensure that no part of the family home is used towards a financial assessment for the provision of long-term care.


When you make a will, you can set up a lifetime interest trust at the same time. The terms of the trust are set out in your will, naming either executors or appointing trustees who will manage the trust on your behalf.


This type of trust can also be used when a surviving spouse remarries and may go on to have children. In normal circumstances, when the surviving spouse dies, their estate will pass to their existing partner and any children from that subsequent relationship. This may mean that any children from the first marriage/civil partnership may not receive the inheritance you wished. By setting up a lifetime interest trust, it is possible to avoid this situation from occurring, which is called sideways disinheritance. At the same time, the surviving spouse is able to stay in the family home, which won’t pass to any children until they die.


Of course, this doesn’t mean that the life tenant (surviving spouse) isn’t allowed to sell the family home after the death of their spouse, i.e. to downsize the property. They are entitled to sell the property and use the proceeds to buy another house. However, any remaining funds must be held in the trust, i.e. retained by the trustees, to ensure the beneficiaries ultimately receive the inheritance they are entitled to. That said, there is the exception that if the life tenant is living in the property and receiving an income from the trust, any value they generate from selling the property they are entitled to keep, but it is only limited to the income and not the full value of the property.


Disadvantages of a lifetime interest trust


Despite all the above advantages to a lifetime interest trust, there are also disadvantages, although this may depend on your personal situation.


  • Your property and assets placed in the trust will be legally owned by the trustees you nominate so, make sure all parties fully understand their obligations and consider the role carefully before accepting.
  • Before you finalise the trust, make sure the tax implications have been thoroughly reviewed and understood. It’s possible that the trust and/or beneficiaries are liable for income tax or capital gains tax, even if they don’t have to pay inheritance tax.
  • Should you divorce your spouse/civil partner and later re-marry, the terms of the original trust may be affected. Therefore, the trust should be reviewed and adjusted as required.
  • Setting up a trust with the sole purpose of avoiding or reducing care home fees is not allowed.


Before you proceed with setting up a lifetime interest trust, it is always highly advisable to seek professional advice and guidance.


At Norfolk Will Writing, we have been helping our clients write their wills and set up trusts, as well as assisting executors of estates and families to manage the probate process for over 20 years. We offer a personalised service, keeping the process as simple and easy as possible. Our experienced consultants are on hand to guide you at every step. Contact us for your free consultation and to book an appointment with one of our consultants to discuss writing your will today or carrying out your executor duties.

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