Information April 2020

Life Interest Trusts

Introduction In addition to the Life Tenant's right to

receive the income from, or to use any
This information sheet sets out briefly for property comprised in, the trust, the trustees
general guidance the main features of Life will usually be given a power to advance
Interest Trusts and their tax implications. A some or all of the capital in the trust to the
number of important and technical points beneficiary. If such a power is included, the
arise. Specific advice should be obtained trustees will not be required to exercise it,
before such a trust is used in any particular but will be able to exercise it if they consider
case. it appropriate.

What is a Life Interest Trust? The trust will specify what will happen to the
capital in the trust, to the extent that any
Life Interest Trusts are so called because power of advancement has not previously
they give a particular beneficiary the legal been exercised, on the Life Tenant's death.
right to receive the income from, or to use At that time, there may be a successive life
property comprised in, the trust. This right interest in favour of another beneficiary or
normally lasts throughout the beneficiary's trusts in favour of, for example, the Life
lifetime. Sometimes the right terminates on, Tenant's children. If required, either the
for example, the beneficiary's remarriage or trustees or the Life Tenant can be given
on the death of some other person, but this either limited or very wide powers to
information sheet deals only with life determine who should benefit after the Life
interests which continue until the Tenant's death, or such matters may be
beneficiary's death. determined in advance by the Settlor.

The person who creates a trust is known as A Life Interest Trust may continue for up to
the Settlor. The beneficiary is often 125 years from its creation. This was
referred to as the Life Tenant. This is not limited to 80 years for trusts created before
to be confused with the tenant under a 5 April 2010. The Settlor will provide how
lease. any assets which may be left at the end of
the trust period must devolve.
The trustees may collect the trust income
and account for any tax due. If they do, the Use of Life Interest Trusts
Head Office
Heathervale House
amount of the trust income which the Life
2-4 Vale Avenue Tenant is entitled to receive is net of any The main use of Life Interest Trusts is
Tunbridge Wells trust administration expenses which are where the Settlor knows in advance who
Kent TN1 1DJ properly chargeable to the income. should benefit under the trust, but where the
T 01892 510000
F 01892 540170 Alternatively, the trustees may make Settlor does not want to confer outright
arrangements for the trust income (for ownership. The trustees will retain control
Thames Gateway example, dividends and deposit interest) to of the trust assets, albeit control which they
Corinthian House
be paid directly into the Life Tenant's bank must exercise in the combined interests of
Galleon Boulevard
Crossways Business Park account. In such circumstances, the the Life Tenant and the beneficiaries
Dartford trustees will not be separately assessed to entitled after the Life Tenant's death.
Kent DA2 6QE
T 01322 623700
Income Tax.
F 01322 623701

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 April 2020

Life Interest Trusts

(continued)

The Trustees interest in existence at 22 March 2006 was

replaced before 6 October 2008 by a
The trustees have the job of safeguarding successive life interest or, from that date
the trust assets and must always act in the onwards, if the successive life interest
best interests of the beneficiaries. arises on death and is in favour of the
Particularly if the trustees are given powers surviving spouse*.
to advance capital to the Life Tenant or to
dictate what will happen after the Life A life interest arising on death under a will
Tenant's death, care must be taken in (called an immediate post-death interest) is
choosing the trustees. The Life Tenant can also largely be governed by the pre-2006
be a trustee, but should not be given power Budget IHT rules, with the Life Tenant being
to act as a sole trustee. If required, the treated as owning the trust assets.
Settlor can act as a trustee.
If the Life Tenant uses the trust assets in
Tax implications connection with the Life Tenant's business
or farming, Business or Agricultural Property
The Inheritance Tax (IHT) and Capital Relief may be available to the trustees.
Gains Tax (CGT) rules affecting Life Interest
Trusts were radically changed by the 2006 2 CGT
Finance Act, taking effect from Budget day
on 22 March 2006. The trustees will be liable to CGT currently
at 20% (but still at 28% on residential
1 IHT property) in respect of any gains exceeding
the trustees' available annual exemption,
With the exception of new trusts for some presently being a maximum of one half of
disabled persons, the creation during the individual’s annual exemption. If
lifetime of a Life Interest Trust on or after 22 available in relation to the Life Tenant,
March 2006 is treated as a chargeable entrepreneurs’ relief will reduce the rate to
transfer by the Settlor and the Discretionary 10%.
Trust charging regime will apply to the trust.
These aspects are dealt with in the Under a trust created before 22 March
information sheet Discretionary Trusts. 2006, on the original Life Tenant's death the
base value of the trust assets will usually be
For trusts made before 22 March 2006, uplifted to their then value without any CGT
while the existing life interest continues the charge. This uplift wipes out any unrealised
trust assets are still treated for IHT gains (except any which have been held
purposes as being comprised in the Life over by the Settlor to the trustees). The
Tenant's estate. On the Life Tenant's same treatment will apply to a successive
death, subject to any exemptions or reliefs life interest which arose before 6 October
which then apply, IHT will be payable on the 2008, and to life interests arising
combined value of the trust assets and the subsequently on the death of a spouse. In
Life Tenant's own estate. The trustees will almost all other cases there will now be no
be responsible for paying the proportion of CGT rebasing on the Life Tenant's death.
the IHT payable in relation to the trust
assets. These rules also apply where a life

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Life Interest Trusts

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The transfer of chargeable assets into a Life entitled to receive the income is taxable at
Interest Trust will be a disposal for CGT by the higher or top rates, the Life Tenant will
the Settlor. Any liability to CGT will depend have to account to HMRC for a further tax.
on the Settlor's own circumstances. For A Life Tenant who is a non-taxpayer may
gifts on or after 22 March 2006 any gains reclaim tax previously paid by the trustees.
accruing to the Settlor may be held over
and, in effect, transferred to the trustees If the Settlor or his/her spouse is a possible
(except as mentioned below). This is more beneficiary, all the trust income will normally
favourable than for gifts before that date, in be taxed in the Settlor's hands during the
respect of which hold-over relief was only Settlor's lifetime.
available for business assets.
If income is payable from the trust to a
Where the Settlor has retained an interest in minor, unmarried child or stepchild of the
the trust as a possible beneficiary, it is not Settlor, it will also be taxed in the Settlor's
possible to hold over gains, even in hands.
business assets, to the trust.
Administration
A Settlor is regarded as having an interest if
there are any circumstances whatsoever A Life Interest Trust needs to be properly
under which the assets within the trust or administered. This usually involves the
the income arising to the trustees may trustees registering the Discretionary Trust
become payable to the Settlor or to his/her with HMRC’s online Trust Registration
spouse*. The Settlor will also be regarded Service, filing annual Tax Returns and
as having an interest if his/her minor and issuing tax deduction certificates to the Life
unmarried children or stepchildren can Tenant, unless all the trust income is paid
benefit. directly to the Life Tenant and assessed on
the Life Tenant. The trustees should also
Should any beneficiary become entitled maintain trust accounts and properly
outright to the trust assets, the trustees will manage the trust's property or investments.
be treated as if they had disposed of them. The amount of administrative work will
Whether or not hold-over relief will be depend on the nature of the trust assets.
available will depend (except in the case of
business assets) on how and when the trust Conclusion
was made.
A Life Interest Trust may be suitable for an
3 Income Tax individual who wishes to transfer assets for
the benefit of one or more particular
The trustees are generally subject to beneficiaries without giving them outright
Income Tax at the basic rate, presently control of the assets. Although there will be
20%, but pay at 7.5% in relation to no discretion about the payment of the
dividends received. The trustees are not income, at least during the Life Tenant's
eligible for any personal or dividend lifetime, such trusts can otherwise be drawn
allowances, nor can they deduct any trust rigidly or flexibly. The trustees can be given
administration expenses when calculating powers partially or completely to terminate
their tax liability. If the Life Tenant who is

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Life Interest Trusts

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the Life Tenant's income entitlement and to If you require further information, please
reallocate it, or even to create new trusts. contact Mark Politz, Stuart Goodbody or
Nicola Plant on 01892 510000 or by email
at:

Disclaimer mark.politz@ts-p.co.uk
stuart.goodbody@ts-p.co.uk
This information sheet is written as a nicola.plant@ts-p.co.uk
general guide. As any course of action
must depend on your individual * All references to the term "spouse" include
circumstances, you are strongly a civil partner as defined by Section 1 of the
recommended to obtain specific Civil Partnership Act 2004
professional advice before you proceed.
© Thomson Snell & Passmore LLP All Rights Reserved
We do not accept any responsibility for
action which may be taken as a result of
having read this information sheet.

NOTE: The law is stated as at 6 April 2020.

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