The life tenant has the immediate right to receive the income from the trust property or have the use or enjoyment of it (eg living in a property). After the life tenant's death, the assets held within the trust are then transferred to the beneficiaries, who are often children or other loved ones.
Unmarried couples do not benefit from the same inheritance tax savings as married couples and those in civil partnerships. The biggest disadvantage for unmarried couples is the lack of spousal exemption. The spousal exemption allows married couples, and those in civil partnerships, to leave assets to the surviving spouse on death without incurring any inheritance tax.
Married couples and those in a civil partnership also benefit from the unused nil rate band. This allows any unused nil rate band allowances from the first spouse's death to be transferred to, and used for the benefit of, the second spouse's estate on death. In contrast, unmarried couples are subject to inheritance tax at 40% on the transfer of assets between themselves on death over and above the nil rate band.
Life interest trusts for unmarried couples can offer some advantages for inheritance tax planning and asset protection, such as allowing the surviving partner to be financially secure and protecting assets from potential claims by third parties or other family members of the life tenant. It also allows the deceased partner to retain a level of control over the distribution of their assets. However, there are several disadvantages too. Some of these are:
Unmarried couples should carefully consider what the life interest trust should apply to - the family home, investment assets, or their entire estate and how they would like their children or remainder beneficiaries to benefit, before leaving a life interest trust to the surviving partner. Careful consideration should also be given to the inheritance tax consequences of such a trust.