Will Tax Planning – Life Interest Trusts

It is very common in a Will to leave a significant part of one’s estate to a surviving spouse/civil partner. Any amount left to such a person is normally exempt from Inheritance Tax (although restrictions may apply if the transferee is not domiciled in the UK –see separate article on this subject). However the same exemption may be achieved by using a Life Interest Trust (LIT) in a Will, but if suitably drafted, can incorporate flexibility whereby other beneficiaries may benefit should the survivor not require the provision on the first death.

The LIT is usually flexible as it allows the Trustees to advance capital as well as income to the survivor, if required. Some LITs are more restrictive and only permit the income to pass to the surviving spouse / civil partner, with the capital always being held by the trustees for the longer term beneficiaries.

A LIT set up by Will is created on the death of the first spouse / civil partner so the capital assets of the deceased pass into the LIT which pays any income generated to the survivor for their lifetime.  As the transfer of assets to the trust is exempt from IHT it does not use any of the nil rate band of the deceased spouse – preserving it for later use on the death of the surviving spouse.  On the death of the survivor, any remaining trust capital is passed to nominated beneficiaries, such as children.

Because the capital in the trust is not owned by the surviving spouse / civil partner, it cannot be given away by them to, say, a new spouse or partner thus providing more control over the assets than if they were given to the surviving spouse / civil partner outright.

Appointments of capital to a beneficiary other than the surviving spouse/civil partner would be treated as potentially exempt transfers (PETs). Any assets still owned by the LIT on the survivor’s death will be treated as part of their estate for Inheritance tax purposes.

There may be other planning opportunities offered by LITs depending on particular circumstances.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.