Most couples make straight-forward Wills, leaving everything to each other on the first death and their children on the second death.
However, a straight-forward Will is not always the most adequate way to provide cover for what you require, particularly later in life given your circumstances.
When property is owned jointly, it is worth considering whether you should create a life interest on the death of the first owner. Life interest provisions apply equally to married, civil partnerships and couples that are unmarried. The term ‘property’ can be extended to cover any assets, not just the house you live in.
Creating a Life Interest Will
To create a life interest, you need to own your property as tenants in common. This means both parties own in shares (usually 50% each). When one party dies, the survivor inherits a life interest in the deceased’s share and becomes the life tenant. The life tenant has the beneficial interest during their lifetime and not the ownership. The trustees become the legal owners of the trust property. When the trust ends your chosen beneficiaries (under the will trust of the first to die) will receive the property that had belonged to the deceased.
A life tenant has an ‘interest in possession’ (‘IIP’). When a life interest begins immediately after death of the person creating the trust, this is known as an ‘immediate post death interest’ trust (‘IPDI’).
Benefits of making a will incorporating an interest in possession are:
- You know that your chosen beneficiaries will ultimately benefit, even if your surviving spouse/partner disinherits those beneficiaries under the terms of his/her own Will.
- You know that your chosen beneficiaries will ultimately benefit, even if your surviving spouse remarries or enters into registered civil partnership and forgets to make a new Will.
- There may also be some advantages where care home fees are concerned
What about tax implications and declaring income?
- Declaring income
Income may come from a house for example if this is rented out or the proceeds reinvested for the life tenant or it may come from all of the deceased’s assets that have been left on a life interest. This income will need to be declared by the trustees. If income is paid directly to the life tenant, they declare this on their own tax return.
As of 6 April 2016, dividend income is taxed at 7.5% and all other income at 20%.
Note! Trustees do not qualify for dividend or savings allowances.
- Capital Gains Tax (‘CGT’)
Did you know that trustees are a separate entity for CGT purposes?
The annual allowance for a trustee is half of an individual’s. Rates depend on what asset is being disposed of. Currently, residential property is taxable at 28% and other chargeable assets are taxable at 20%.
- Inheritance Tax (‘IHT’)
Assets held as IIP are treated for tax purposes as belonging to the life tenant. If the trust is brought to an end during the life tenant’s lifetime, it is treated as a ‘potentially exempt transfer’ (‘PET’) for IHT. If the life tenant dies within 7 years of termination of the trust the PET is aggregated with their own estate when calculating IHT.
If the trust ends on the life tenant’s death, the capital value of the trust will be aggregated with the life tenant’s estate when calculating IHT. If the value exceeds the nil rate band (currently £325,000 per individual), it is taxed at 40% on the excess apportioned between the trust and the estate.
Duties of trustees
Trustees have duties which they must carry out, and powers which they must consider, in taking on the role of a trustee.
Assets of the deceased which pass under the immediate post-death interest trust should also be transferred into the names of the trustees.
Further information
Please note this is a basic outline on life interest and more detailed tax advice can be given on your own circumstances.
If you require further information on the above and costs involved to set up a life interest trust then please contact Rothera Bray’s Wills and Probate Department who will be able to offer you specialist advice on whether this could be the most appropriate trust for you. Contact us by email enquiries@rotherabray.co.uk or call 03456 465 465.
