Life interest trusts for unmarried couples

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:

• The transfer of assets to trust on death will be subject to inheritance tax of 40% over the nil rate band available to the estate.
• The assets in the trust will be seen as assets of the surviving partner (for tax purposes only), the 'life tenant' and taxed again on their death at 40% for any assets transferred over the nil rate band available to the estate.
• The deceased's estate will lose their residence nil rate band allowance if it is not utilised on the first death.
• The surviving partner has limited access to the capital in the trust, which limits their financial flexibility (although provision can be made to allow trustees to provide access to capital).
• Though entitled to the income, the surviving partner does not have control over the assets in the trust.
• The trustees would need to take into consideration the wishes of the life tenant and the remainder beneficiaries. If the interests are not aligned then this can lead to disputes.
• As the assets in the trust are seen as part of the life tenant's estate, it may impact the surviving partner's eligibility for means tested benefits. The income and assets of the trust may be considered when assessing the surviving partner's financial situation.
• Life interest trusts can't be revoked once the testator has died, but can be brought to an end by the trustees and the life tenant, if in agreement.

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.

There are a number of issues to consider when deciding if a life interest trust is right for you. If you would like to find out more about life interest trusts please do get in touch with Angharad Lynn in our Private Client team on 020 7665 0904, or complete the form below.