Interest in Possession Trusts

An interest in possession trust can allow one person to benefit from trust assets during their lifetime, while protecting who should receive those assets later.

They are often used in estate planning where someone wants to provide for a spouse, partner or another beneficiary, without giving them outright ownership of the underlying assets.

At Liberty Estate Planning, we can help you understand how an interest in possession trust works, whether it may be suitable for your circumstances, and how it fits alongside your will, inheritance tax planning, property ownership and wider estate planning arrangements.

What is an interest in possession trust?

An interest in possession trust gives a named beneficiary the right to benefit from the trust assets. This person is often called the life tenant or income beneficiary.

The benefit may be:

• The right to receive income from the trust.
• The right to live in a property owned by the trust.
• The right to use or enjoy a trust asset, depending on the wording of the trust deed.

The life tenant does not usually own the underlying trust assets outright. Instead, the trustees hold and manage those assets in line with the terms of the trust.

The people who receive the trust assets after the life tenant’s interest has ended are usually known as the capital beneficiaries or remainder beneficiaries.

How does an interest in possession trust work?

The exact terms will depend on the trust deed or will that creates the trust, but a common example is where a person leaves assets in trust for their spouse or partner during their lifetime, with the assets then passing to children or other beneficiaries later.

For example, a will may say that a surviving spouse can live in the family home for the rest of their life. The property is held by the trust, but the surviving spouse has the right to occupy it. When their interest ends, usually on death, the property or its value passes to the beneficiaries named in the will.

This type of arrangement can be helpful where someone wants to support one person during their lifetime while also preserving the eventual destination of the assets.

When might an interest in possession trust be used?

An interest in possession trust may be considered in a range of estate planning situations, including:

• Providing for a spouse or partner after death.
• Protecting assets for children from a previous relationship.
• Allowing someone to live in a property without giving them full ownership.
• Providing income for a beneficiary while preserving the capital.
• Giving clarity over who should receive assets after the life tenant dies.
• Managing family wealth where outright gifts may not be appropriate.

They are often considered by families with blended family arrangements, second marriages or concerns about how assets should pass between different generations.

What rights does the life tenant have?

The life tenant’s rights depend on the terms of the trust.

In many cases, they may have the right to receive income from the trust assets. If the trust includes a property, they may have the right to live in that property, or potentially receive income if the property is rented out.

However, the life tenant does not automatically have the right to sell, give away or control the underlying capital. Those powers usually sit with the trustees, who must act in line with the trust deed and their legal duties.

This is why careful drafting is important. The trust should make clear what the life tenant can and cannot do, what powers the trustees have, and what happens when the life tenant’s interest comes to an end.

What are the trustees responsible for?

The trustees are responsible for managing the trust properly and acting in the interests of the beneficiaries.

Their role may include:

• Following the terms of the trust deed or will.
• Managing trust property, investments or other assets.
• Balancing the interests of the life tenant and the capital beneficiaries.
• Keeping appropriate records and accounts.
• Paying trust expenses where required.
• Dealing with tax and reporting obligations where applicable.
• Taking professional advice where the trust is complex.

Trustees must be careful when making decisions, especially where the life tenant’s interests and the capital beneficiaries’ interests are different. For example, the life tenant may want income from the trust, while the capital beneficiaries may be more concerned about preserving long-term value.

What happens when the life tenant dies?

When the life tenant dies, or when their interest ends for another reason set out in the trust deed, the trust assets usually pass to the capital beneficiaries.

The trust deed or will should explain exactly what happens at that stage. This may involve transferring property, selling assets, distributing money, or continuing to hold assets in trust for other beneficiaries.

There may also be tax, probate or estate administration matters to deal with, depending on the circumstances.

Interest in possession trust and tax

The tax position for an interest in possession trust can be complex.

Income tax, inheritance tax and capital gains tax may all need to be considered. The rules can depend on how the trust was created, when it was created, what assets are held, who the beneficiaries are, and whether the trust was created during someone’s lifetime or through a will.

In some cases, trustees may be responsible for income tax on trust income. In other cases, income may be paid or mandated directly to the beneficiary. Inheritance tax treatment can also vary depending on the type of trust and the circumstances.

Because the tax position can change depending on the facts, it is important to take professional advice before creating, changing or administering an interest in possession trust.

Interest in possession trust vs discretionary trust

An interest in possession trust gives a particular beneficiary a defined right to income, occupation or enjoyment of the trust assets.

A discretionary trust works differently. With a discretionary trust, the trustees usually have more flexibility over which beneficiaries benefit, when they benefit, and how much they receive.

Neither structure is automatically better than the other. The right option depends on what you are trying to achieve, who you want to provide for, the assets involved, tax considerations and the level of flexibility needed.

Advantages of an interest in possession trust

An interest in possession trust may help to:

• Provide for someone during their lifetime.
• Preserve assets for future beneficiaries.
• Give clarity over who benefits now and who benefits later.
• Protect the intended destination of family assets.
• Support estate planning for blended families.
• Allow someone to live in a property without owning it outright.

The main benefit is that the trust can separate the right to benefit from the asset now from the right to inherit the asset later.

Points to consider

Interest in possession trusts are not suitable for everyone.

Before setting one up, it is important to consider:

• Whether the trust reflects your family circumstances.
• Who should act as trustees.
• What rights the life tenant should have.
• What should happen if the life tenant moves, remarries or needs care.
• How the trust will be administered.
• The potential tax position.
• Whether the arrangement could create future disputes.
• Whether a different type of trust would be more suitable.

A trust should not be created simply because it sounds useful. It should be carefully matched to your wishes, your assets and the people you want to protect.

How Liberty Estate Planning can help

At Liberty Estate Planning, we can help you understand whether an interest in possession trust may be appropriate as part of your wider estate planning.

We can discuss your circumstances, explain the options clearly, and help you consider how a trust could work alongside your will, inheritance tax planning and family arrangements.

Trust planning is complex, so we recommend taking advice before making decisions about how assets should be held or passed on.

Speak to Liberty Estate Planning

Need advice about trusts, wills or estate planning? Contact our team to discuss your circumstances and the next steps.