Probate and Will, Trust & Estate Disputes

Publish date

9 February 2023

What are Life Interest Trusts and how are they used?

What is a Life Interest Trust?

Life Interest Trusts are so called because they give a particular beneficiary the legal right to receive the income from, or to use property comprised in, the trust. This right normally lasts throughout the beneficiary’s lifetime. Sometimes the right terminates on, for example, the beneficiary’s remarriage or on the death of some other person, but this information sheet deals only with life interests which continue until the beneficiary’s death.

The person who creates a trust is known as the Settlor. The beneficiary is often referred to as the Life Tenant. This is not to be confused with the tenant under a lease.

The trustees may collect the trust income and account for any tax due. If they do, the amount of the trust income which the Life Tenant is entitled to receive is net of any trust administration expenses which are properly chargeable to the income. Alternatively, the trustees may make arrangements for the trust income (for example, dividends and deposit interest) to be paid directly into the Life Tenant’s bank account. In such circumstances, the trustees will not be separately assessed to income tax.

In addition to the Life Tenant’s right to receive the income from, or to use any property comprised in, the trust, the trustees will usually be given a power to distribute some or all of the capital in the trust to the Life Tenant or even to a different beneficiary. If such a power is included, the trustees will not be required to exercise it, but will be able to exercise it if they consider it appropriate.

The trust will specify the Settlor’s wishes about what happens to the capital still held in the trust on the Life Tenant’s death. At that time, there may be a successive life interest in favour of another beneficiary or trusts in favour of, for example, the Life Tenant’s children (who typically might receive trust capital when they reach a particular age). If required, the trust can include either limited or very wide powers for the trustees or the Life Tenant to decide who should benefit after the Life Tenant’s death.

A Life Interest Trust may continue for up to 125 years from its creation. This was limited to 80 years for trusts created before 6 April 2010.

How are Life Interest Trusts used?

The main use of Life Interest Trusts is where the Settlor knows in advance who should benefit under the trust, but where the Settlor does not want to confer outright ownership. The trustees will retain control of the trust assets, albeit control which they must exercise in the combined interests of the Life Tenant and the beneficiaries entitled after the Life Tenant’s death.

What is the role of the Trustees in a Life Interest Trust?

The trustees have the job of safeguarding the trust assets and must always act in the best interests of the beneficiaries. Particularly if the trustees are given powers to distribute capital to the Life Tenant or other beneficiaries, or to dictate what will
happen after the Life Tenant’s death, care must be taken in choosing the trustees. Unless the trust provides otherwise, the trustees must act unanimously so any one of them effectively has a power of veto. The Life Tenant can be a trustee, but should not be the sole trustee. If required, the Settlor can act as a trustee.

What are the tax implications of Life Interest Trusts?

The inheritance tax (IHT) and capital gains tax (CGT) rules affecting Life Interest Trusts were radically changed by the 2006 Finance Act, taking effect from Budget day on 22 March 2006.


With the exception of new trusts for some disabled persons, the creation during lifetime of a Life Interest Trust on or after 22 March 2006 is treated as a chargeable transfer by the Settlor, and the Discretionary Trust charging regime will apply to the trust. These aspects are dealt with in the information sheet Discretionary Trusts.

For trusts made before 22 March 2006, while the existing life interest continues the trust assets are still treated for IHT purposes as being comprised in the Life Tenant’s estate. On the Life Tenant’s death, subject to any exemptions or reliefs which then apply, IHT will be payable on the combined value of the trust assets and the Life Tenant’s own estate. The trustees will be responsible for paying the proportion of the IHT payable in relation to the trust assets. These rules also apply where a life interest in existence at 22 March 2006 was replaced before 6 October 2008 by a successive life interest or, from that date onwards, if the successive life interest arises on death and is in favour of the surviving spouse*.

These rules do not apply to any assets added to a pre-22 March 2006 trust after that date: the Discretionary Trust charging regime will apply to those assets.

A life interest arising on death under a will (called an immediate post-death interest) is also largely governed by the pre-2006 Budget IHT rules, with the Life Tenant being treated as owning the trust assets.

If the Life Tenant uses the trust assets in connection with their business or farming, Business or Agricultural Relief may be available to the trustees.


The trustees will be liable to CGT currently at 20% (but at 28% on residential property) in respect of any gains exceeding the trustees’ available annual exemption (currently a maximum of £6,150). If available in relation to the Life Tenant, Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) may reduce the rate to 10%. In addition, a Life Tenant who occupies a trust property may qualify for private residence relief on its sale.

Under a trust created before 22 March 2006, on the original Life Tenant’s death the base value of the trust assets will usually be uplifted to their then value without any CGT charge. This uplift wipes out any unrealised gains (except any which have been held
over by the Settlor to the trustees). The same treatment will apply to a successive life interest which arose before 6 October 2008, and to life interests arising subsequently on the death of a spouse. In almost all other cases there will now be no CGT rebasing on the Life Tenant’s death.

The transfer of chargeable assets into a Life Interest Trust will be a disposal for CGT by the Settlor. Any liability to CGT will depend on the Settlor’s own circumstances. For gifts on or after 22 March 2006 any gains accruing to the Settlor may be held over
and, in effect, transferred to the trustees (except as mentioned below). This is more favourable than for gifts before that date, in respect of which hold-over relief was only available for business assets. Where the Settlor has retained an interest in the trust as a possible beneficiary, it is not possible to hold over gains, even in business assets, to the trust. A Settlor is regarded as having an interest in a trust if there are any circumstances whatsoever under which the assets within the trust or the income arising to the
trustees may become payable to the Settlor or to his/her spouse*. The Settlor will also be regarded as having an interest if his/her minor and unmarried children or stepchildren can benefit. Should any beneficiary become entitled outright to the trust assets, the trustees will be treated as if they had disposed of them. Whether or not hold-over relief will be available will depend (except in the case of business assets) on how and when the trust was made.

Income Tax

The trustees are generally subject to income tax at the basic rate, presently 20%, but pay tax at 8.75% on dividends. The trustees are not eligible for any personal or dividend allowances, nor can they deduct any trust administration expenses when calculating their tax liability. If the Life Tenant who is entitled to receive the income is taxable at the higher or top rates, the Life Tenant will have to account to HMRC for the additional tax. A Life Tenant who is a non-taxpayer may reclaim tax previously paid by the trustees.
If the Settlor or his/her spouse is a possible beneficiary, all the trust income will normally be taxed on the Settlor during his or her lifetime. If income is payable from the trust to a minor, unmarried child or stepchild of the Settlor, it will also be taxed on the Settlor. Administration A Life Interest Trust needs to be properly administered. This usually involves the trustees registering the Life Interest Trust with HMRC’s online Trust Registration Service, filing annual Tax Returns and issuing tax deduction certificates to the Life Tenant, unless all the trust income is paid directly to the Life Tenant and assessed on the Life Tenant. The trustees should also maintain trust accounts and properly manage the trust’s property or investments. The amount of administrative work will depend on the nature of the trust assets.


A Life Interest Trust may be suitable for an individual who wishes to transfer assets for the benefit of one or more particular beneficiaries without giving them outright control of the assets. A Life Interest Trust can be drawn rigidly or very flexibly, by giving the trustees powers partially or completely to terminate the Life Tenant’s April 2022 4 Life Interest Trusts (continued) income entitlement and to reallocate it, or even to create new trusts.


The law is stated as at 6 April 2022. If you require further information, please contact

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