Life interest Trusts

When making Wills many couples (those who are married or who have entered into a civil partnership) leave everything they own (their estate) to their surviving spouse or civil partner (their spouse) on the death of the first of them to die. On the death of the first spouse to die their estate would pass to the surviving spouse free of inheritance tax. Since October 2007 the surviving spouse would also inherit the whole of the inheritance tax allowance of the first spouse o die. This would mean on present day figures their estate would only pay inheritance tax on the part of the estate that was worth more than £650,000. This is because the second spouse to die had their own inheritance tax allowance of £325,000 and that of the first to die in the sum of £325,000. The additional inheritance tax allowance has to be claimed by the executors of the spouse or civil partner who dies last.

Whilst leaving the whole of your estate to your surviving spouse or civil partner makes your estate fairly simple to administer after your death you should think about creating a life interest trust in relation to your share in your home. The advantage of this is that if your surviving spouse were to remarry or enter into a new civil partnership after your death you could ensure that your share in your home does pass to the beneficiaries you have chosen – often your children – rather than passing to the new spouse.. In addition it also ensures that in the event of your surviving spouse moving into a residential or nursing home your share in your home would not be used in the payment of residential or nursing home fees but could pass to your beneficiaries before the death of your surviving spouse. You might want to do this in order to make sure that your beneficiaries do receive some inheritance.

Creating a life interest trust does not involve any inheritance tax complications. The inland revenue treat the surviving spouse as owning the deceased’s share in your home for inheritance tax purposes and consequently the spouse who dies second also inherits the inheritance tax allowance of the first to die.

There may be some capital gains tax implications for the beneficiaries on the death of the second spouse to die (or on a sale of the home if earlier) but you can always take legal advices about this. Each beneficiary has a capital gains tax allowance of £11,100 and so any capital gains tax would only be paid on an increase in value of the share in the home over and above that figure (assuming that the beneficiary had not used their capital gains tax allowance elsewhere). If you had more than one beneficiary then they would each have a capital gains tax allowance.

In order to create a life interest trust in your Wills you need to own your home jointly as tenants in common rather than jointly as joint tenants.

In making Wills you should always consider whether a life interest trust would be appropriate for your circumstances rather than just assuming that you should automatically leave everything to your surviving spouse.

If you would like any information about this then please do contact me on or alternatively make an appointment to call in and discuss the matter.