Westfield WILLS
Flexible Life Interest Trust Protecting
your Family’s Future
Reasons for considering
When making your Will, you may want to ensure your spouse/civil partner is well-provided for but feel anxious about what would happen if his/her situation changes.
If your whole estate passes directly to your spouse, there is a risk that your children’s inheritance may be lost entirely or substantially reduced. If, for example, your spouse:
- Remarries/has a new partner
- Needs long-term care
- Owes money to others
- Changes his/her Will
If you are in a couple with children from previous relationships, you may be concerned about how family relationships can change after death and the increased risk of conflict and loss of inheritance. You may also feel concerned about your children (or other beneficiaries) inheriting, for example, if they are young, vulnerable or go through a divorce in future.
A Flexible Life Interest Trust can offer several benefits:
Protection for your spouse/civil partner
Flexibility to respond to changing circumstances
Asset protection
Provide for multiple generations
Protection of vulnerable or young beneficiaries
Inheritance tax planning opportunities
A Flexible Life Interest Trust can offer several benefits:
Protection for your spouse/civil partner
Flexibility to respond to changing circumstances
Asset protection
Provide for multiple generations
Protection of vulnerable or young beneficiaries
Inheritance tax planning opportunities
Flexible life interest trust
FAQ’s
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What assets can I include in a Flexible Life Interest Trust?
Property, money, investments, and important possessions. Many people choose to include either the residue or whole of their estate within the trust.
How will my spouse be provided for?
Your spouse can be given a right to receive income generated from the trust for life.
Your trustees will also have powers to loan or gift the capital of the trust fund to your spouse and other named beneficiaries. This enables flexibility to meet future needs.
If you include your home in the trust, your spouse can be given a right to remain as well as flexibility to move to a new home that continues to be protected by the trust.
How are assets protected?
Assets are protected because the beneficiaries do not own the trust property. Trustees will only make distributions if they think that it is wise to do so. This means your legacy is better protected from third parties e.g. where there is remarriage, divorce, bankruptcy, care fees, lifestyle or vulnerability issues.
Who can be my trustees?
Trustees can be family, friends or a professional trustee. You must be confident that your trustees will act fairly. You should appoint between two and four trustees.
You can include a letter of wishes to guide your trustees over how funds are used.
Why is this type of trust good for married couples/civil partners?
Assets passing into the trust benefit from the spousal exemption to Inheritance Tax.
- No periodic or exit charges from the trust fund apply whilst your spouse is alive (unless the trust is ended early).
- If your home is included in the trust, providing the trustees appoint out the property within two years of the survivor’s death, executors may claim the valuable Residence Nil Rate band if qualifying criteria is met.
- On the survivor’s death, the trust becomes a discretionary trust. Whilst this provides ongoing asset protection for your beneficiaries, your trustees should seek advice on how to manage the trust in a tax-efficient way as different rules apply.
Flexible Life Interest Trust
Tax Overview
This guide is to help you understand the key points of how Flexible Life Interest Trusts are taxed and is based on the current 2021/2022 tax year rules and therefore may be subject to change.
Flexible Life Interest Trusts give a life interest to the surviving spouse/C.P. for any income arising. There is also flexibility for loans or gifts of capital to the survivor or other beneficiaries of the trust. Priority is often given to surviving spouse/C.P.
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Inheritance Tax (IHT)
- Assets passing into the trust benefit from the spousal exemption for IHT.
- There are no ten-year anniversary or exit charges whilst the life tenant is alive (unless the life interest is given up early).
- If payments are made to other beneficiaries, there are no charges to IHT for the trust to pay, however, this will be viewed as a gift by the life tenant so if the life tenant fails to survive seven years this will use up part of the Nil Rate Band allowance on death.
- On death of the life tenant, the value of the trust fund is combined with his/her own estate and if IHT is due the trust will pay a proportionate amount.
- The trust fund is then taxed as a discretionary trust.
- The trust fund will be revalued every ten years and IHT charged up to 6% of the value if the amount exceeds the Nil Rate Band and reliefs at the time.
- When the trustees make payments to beneficiaries, an exit charge may be applied if the value of the trust exceeds the Nil Rate Band. The amount payable will be calculated based on the length of time held in trust since commencement or if after ten-years has passed the most recent ten-year anniversary date.
- Trustees may make distributions from the trust fund without an exit charge within the first quarter following every ten-year interval.
- If the trust contains a former residence of the deceased, the trustees may appoint out the property (within two years of death) to qualifying beneficiaries to claim the Residence Nil Rate Band. This is subject to other qualifying criteria of the RNRB being met.
Capital Gains Tax (CGT)
- The death of the testator does not create a charge to CGT
- The trustees receive the trust fund at Probate value – known as the trustees base cost.
- On death of the life tenant, assets held in the trust are given a further tax-free uplift to Probate value
- Charges to CGT arise when property or other assets (providing not exempt) are sold or transferred to beneficiaries and where the value has increased above the base cost.
- Trustees have an annual allowance of £6150. If there are multiple trusts, the allowance is shared between them. The CGT rate for trustees is 20% and 28% for residential property.
Income Tax
- Whilst the life tenant is alive, income is taxed at 20% and 7.5% on dividends. The trustees may mandate income to the life tenant so that he /she pays tax directly through self-assessment.
- On death of the life tenant, discretionary trust tax rates apply. On the first £1000 of income received annually, the trustees will pay tax on this at the standard rate of 20% and 7.5% on dividends. After this, income is taxed at 45% and 38.1% on dividends.
- Depending on the beneficiary’s income tax rate, he/she may be able to reclaim some or all of the tax paid by the trustees after receiving an income payment from the trust.