Life interest trusts and the Immediate Post-Death Interest

A life interest trust — also called an interest in possession trust — gives one person, the life tenant, the right to trust income, or the right to live in a property, for a defined period, almost always their lifetime. The capital itself passes to different people, the remaindermen, only when the life interest ends.

It is the standard structure behind a will that says a surviving spouse can live in the house for as long as they want, and that it passes to the children afterwards — particularly common in blended-family planning.

An IPDI is a specific, statutorily defined type of life interest trust.

Under s.49A IHTA 1984 (inserted by the Finance Act 2006, in force since 22 March 2006), an interest in possession is an IPDI only if four conditions are met: the trust was effected by will or under the law relating to intestacy; the life tenant became beneficially entitled to it on the death of the testator or intestate; it is not a trust for a bereaved minor and not a disabled person's interest; and that third condition has held continuously since.

Meet all four and the trust keeps the older, more favourable IHT treatment — miss any one and it falls into the relevant property regime instead.

Under s.49 IHTA 1984, a person with a qualifying interest in possession is treated as if they personally own the asset the interest sits over. For an IPDI, that means the trust property counts as part of the life tenant's own estate when they later die — taxed once, at that point, exactly like anything else they owned outright.

A discretionary trust, and most other interest-in-possession trusts created since 22 March 2006, is taxed instead under the relevant property regime: a ten-yearly principal charge of up to 6% of the trust's value above its own nil-rate band, plus exit charges whenever capital leaves the trust between anniversaries — regardless of what happens to any individual beneficiary.

It depends on who the life tenant is — this is not governed by the same rule that taxes the trust.

The residence nil-rate band's own test is s.8J IHTA 1984 ("inherited"), read with s.8K IHTA 1984 ("closely inherited"): a home held in trust only qualifies if either the person who becomes beneficially entitled to an interest in possession in the property on the death is a lineal descendant of the person who died (or that descendant's spouse or civil partner), and that interest is an IPDI or a disabled person's interest — or the property becomes settled property to which s.71A IHTA 1984 (a bereaved minor's trust) or s.71D IHTA 1984 (an 18-to-25 trust) applies for the benefit of such a lineal descendant.

In the common blended-family structure — a spouse given the life interest, children from an earlier relationship as remaindermen — the life tenant is the spouse, and a spouse is not a lineal descendant of the person who died, so the home is not closely inherited on that first death and the residence nil-rate band is not available that way. It isn't lost, though: any unused residence nil-rate band carries forward as transferable residence nil-rate band, claimable against the surviving spouse's own estate when they later die (s.8G IHTA 1984).

Where the life tenant is instead a direct descendant — a parent's will leaving the home on IPDI trust for an adult child as life tenant — the test is met directly, on that first death. See GOV.UK's residence nil-rate band guidance for the underlying direct-descendant test. The full residence nil-rate band mechanics, including the taper, live on a separate page.

It can be created either way. Most IPDIs are set up directly in the will.

But a deed of variation made within two years of the death, and meeting the requirements of s.142 IHTA 1984, is treated for inheritance tax purposes as if the deceased had made that disposition themselves — so redirecting part of an estate into a life interest trust by variation can still satisfy the condition that the life tenant becomes entitled on the death of the testator or intestate. This is one of the standard ways an IPDI gets created after the fact, typically to put right a will that never provided for one.

It is taxed as relevant property instead — the same regime that applies to most discretionary trusts. That means periodic ten-yearly charges and exit charges on the trust itself, rather than the property being treated as part of the life tenant's own estate.

This most commonly happens when a life interest is created during someone's lifetime, as a lifetime settlement, rather than by will or intestacy — the first of s.49A's four conditions specifically requires the trust to arise on death.