What is a life interest trust?

A trust whose income is paid to a particular beneficiary (the ‘life tenant’) during that beneficiary’s lifetime and whose capital passes to other beneficiaries on the death of the life tenant. In the case of the Property Protection Trust Will, the surviving co-owner is the life tenant and the children (usually) are the beneficiaries to whom the trust’s capital passes on the death of the life tenant.

What is ‘income’?

It depends on how the capital assets of the trust are held. It includes interest earned at a bank or building society, dividend payments on shares and rental payments on any rental property. Most importantly, it includes the right to occupy a property held by the trust rent-free, which is particularly relevant in the case of a Property Protection Trust Will, where the trust’s only asset will be the share of the property owned by the deceased co-owner.

When do the children receive their inheritance?

They inherit the value on the death of the life tenant (i.e., the second co-owner to die). If the property has been sold before the death of the surviving co-owner, then they inherit the value of the trust’s half of the sale proceeds at the date of the death of the surviving co-owner.

Principal Private Residence relief from Capital Gains Tax will be available on the trust’s half of the property by virtue of its occupation by the life tenant.

Do the children have to be the eventual beneficiaries of the Property Protection Trust?

No. The eventual beneficiaries could be grandchildren, other relatives, friends or even charities.

Can the life interest trust be brought to an end before the death of the surviving co-owner?

Yes, the trustees can bring the trust to an end if the property has been sold and they believe that the income generated by the sale proceeds exceeds what is required for the surviving co-owner’s needs. The trust’s assets could then be distributed to the children before the death of the surviving co-owner.

This provision is rarely used. However, it could be useful in circumstances where the property has been sold, the surviving co-owner is in care or reliant on benefits and any income from the trust only reduces those benefits pound for pound.

Should unmarried couples make Property Protection Trust Wills?

Yes, the Wills can be made by any co-owners of property.

Is the trust difficult and expensive to run?

No. As the trust's only asset is half a property and will not produce an income, there is no need for any tax returns to be submitted to HM Revenue and Customs (‘HMRC’). However, it might be that the trust, after the first death, needs to be registered at HMRC.

All the trustees need do, is check that the property is insured and being kept in good repair.

If the property is sold whilst the surviving co-owner is alive, then unless all the sale proceeds are being used to purchase a replacement property the trustees will need to inform HMRC that a trust has been formed as the trust now holds cash which will produce an income. However, as long as all the income is payable to the surviving co-owner, HMRC will not expect the trustees to file a trust tax return. All the income can be declared on the surviving co-owner’s tax return.

What formalities do the trustees need to follow on the death of the first co-owner to die?

Ideally, they should join in with the surviving co-owner in transferring the legal title to the property at the Land Registry into the names of the trustees and the surviving co-owner. This is a relatively simple process, and the transfer deed will record the basis upon which the trustees and the surviving co-owner hold the legal title to property i.e., half for the surviving co-owner, half in the Property Protection Trust.

However, this is not essential. When the joint tenancy was severed, a tenancy-in-common restriction will have been entered on the Land Register, which protects the trustees’ interest insofar as the surviving co-owner would be unable to sell the property on their own. The trustees could quite properly not alter the title deeds and simply receive their share of the sale proceeds on the death of the surviving co-owner (although the sale would be conducted by the surviving co-owner’s executors rather than the trustees - but of course, they may well be one and the same).

Who should be appointed trustees?

As long as there are at least two, it matters little as long as they are trusted by the client and willing to take on the appointment. The surviving co-owner and one or more adult children can be appointed, or other relatives or friends or professional trustees. Unlike some other Wills (e.g., Revocable Life Interest Trust Wills), the trustees have no discretion in the way they run the trust - they hold the trust assets for the surviving spouse for life, then for beneficiaries in defined shares.

What protection does the surviving co-owner have?

Complete protection, even if they are not one of the trustees (although most commonly they will be one of the trustees). The trustees are legally bound by the terms of the trust which are that

• the surviving co-owner can live at the property rent-free
• at the request of the surviving co-owner, the trustees must join in with the co-owner in selling the property and use the sale proceeds to purchase another property to which the same conditions attach

The surviving co-owner must insure the property and keep it in good repair.

How does the purchase of a replacement property work in practical terms?

It is quite straightforward. Take for example a property valued at £200,000. After the death of the first co-owner, it will be owned 50% by the surviving co-owner, and 50% by the trust. At the request of the surviving co-owner, the property will be sold and on completion of the sale (ignoring the costs of the sale which would be borne equally between the surviving co-owner and the trust), the surviving co-owner will have £100,000, the trust £100,000.

If the surviving co-owner has identified a replacement property for £100,000, then he or she has the choice of

1. having the trust purchase the replacement property
2. purchasing the replacement property themselves
3. a combination of 1 and 2

In the case of 1, the surviving co-owner can live rent-free at the replacement property and has £100,000 to deal with as he or she wishes. On the death of the surviving co-owner, the replacement property can be sold, and the sale proceeds pass to the children.

In the case of 2, the trust has £100,000 in cash to invest. The trustees will decide the most appropriate form of investment (it may simply be an interest-bearing bank account) and pay any income to the surviving co-owner. On the death of the surviving co-owner, the £100,000 (or a greater or lesser sum depending on the performance of the chosen investment) will pass to the children.

In the case of 3, the trust will own a proportion of the replacement property and have cash to invest. On the death of the surviving co-owner, the children will receive the value of the proportion of the replacement property and the value of the cash invested.

It is worth bearing in mind that in the overwhelming majority of cases the surviving co-owner never wishes to leave his or her home and buy a replacement property.

What is the position if the surviving co-owner goes into care?

If the survivor goes into care, the value of the half-share of the property in the trust will not be taken into account for the purposes of means-testing. The value of the half-share belonging to the surviving co-owner will of course be considered, although it is valued on an open market value basis i.e., what a third party would pay for half a property when the other half is owned by a trust, which could be significantly less than 50% of the value of the property as a whole.

If, after the surviving co-owner goes into care, the property is sold, half the sale proceeds will pass to the trust. Any income produced is to be paid to the surviving co-owner.

On the death of the surviving co-owner, the trust’s half of the sale proceeds will pass to the children.

Is there a deliberate deprivation of assets?

No. It must be stressed that there is no deprivation of assets in a Property Protection Trust Will. A local authority will not raise any argument against a Property Protection Trust Will should the surviving co-owner go into care (in contrast to transactions where the person going into care has transferred the property into a trust during their lifetime).

A person is entitled to dispose of their estate on their death as they please. In a Property Protection Trust Will, a person is simply saying that they want the surviving co-owner to have the use of their property, but that the property is eventually to go to their children. A person has the right to do this, and it is not open to challenge by a third party.