Family Home and a Life Interest under your Will – Back to Basics

For most people, the primary wish when providing instructions for a Will is to ensure that loved ones receive their inheritance. Review of our Back to Basics - Standard Wills highlights some of the standard provisions inserted into many Wills written by Solicitors. However, whilst simplicity may appear to achieve the desired "result", a willingness to "think outside the box" may prove to be of far greater financial benefit to your family in the long run.

Couples traditionally wish to leave everything to each other upon first death, with ultimate and final distribution to the children upon the second death. The growing dilemma faced by the children is the consequences of the surviving parent entering nursing care and being required to fund their stay. Average costs amount to approximately £600 - £900 per week or £40-£60K per annum. The “inheritance" anticipated to pass to the children within the Will of the survivor is rapidly exhausted with the payment of care fees.

For a large proportion of our Clients, the family home, is by far the largest and most valuable asset of a person's financial Estate. It also offers a unique opportunity to "ring fence" an asset and protect it against attack from the Local Authority when assessing an individual’s financial contribution to care fees. The family home is the one asset that is both valuable and yet at same time offers little financial assistance to an individual upon a day to day basis (unless you are renting out rooms in your home and operating a guest house). The value tied up in the bricks and mortar only becomes realized, when the property is eventually sold by the children following both parents death. For the surviving parent, the reality in fact is that they require a roof over their head, not access to the equity within the property. The solution is to consider an alternative approach to the traditional gift between spouses upon first death. This is achieved through the use of a Life Interest created over the family home.

The foundation stone of this scheme is to initially review the legal ownership of the home to ascertain whether the property is held as a Joint Tenancy or a Tenancy in Common. The Back to basics - Severance of the Home information sheet explains the significance of this difference. If necessary, severance must take place during your lifetime to ensure each co-owner owns a 50% share of the property that they can "control" within the terms of their Will. Then, instead of following the traditional path of allowing this share to pass automatically to your surviving spouse/ partner, the deceased's share is immediately gifted to the ultimate beneficiaries who are proposed by you both to eventually inherit the home (traditionally the children). The outright gift to the children however is conditional upon an initial and immediate Life Interest that is granted to the surviving spouse for the remainder of their life. In essence, the children are legally required to “wait in the wings" for the surviving parent's death to actually benefit from the gift they have received.

For the purpose of any future financial assessment, only the survivors own 1/2 share of the home will be taken into consideration. Their Life Interest in the remaining half gifted to the children cannot impact upon their resources and therefore is effectively "ring fenced" and protected for the children. Obviously, this is a solution that doesn't address other assets of the survivor, but at least achieves a degree of certainty in ensuring a guaranteed sum will be protected for the next generation.

The Trust is designed to "catch" any home that you own at death. You can also set aside a contingency fund to cover running costs. It is suggested that special Property Trustees are appointed to administer this Trust. The Trustees are traditionally given power to advance capital or make a gift of the Trust property to your surviving spouse - though this power is discretionary. Therefore, with the consent of the Property Trustees, the arrangement could be closed and the property returned to the surviving spouse if this was required by them - though this obviously places the whole property at “risk"  to care fees. Alternatively, the Trust can be transferred to another property if the surviving spouse wishes to relocate. All in all, great flexibility is achieved for the benefit of the surviving spouse, whilst securing a guaranteed financial inheritance for the children.

Three specific taxes need to be considered with this Trust arrangement:

Inheritance Tax - This scheme does not and is not designed to mitigate tax. The gift by the first to die (if between husband & wife) will attract Spouse Exemption and incur no tax liability. The technicalities of IHT means that the surviving spouse as Life Tenant is taxed on all their wealth, including their interest under the Trust. Accordingly, the final tax liability on second death is no different than had they inherited everything from the outset.

Capital Gains Tax - subject to the rules applicable to CGT being observed, the right of the survivor to occupy the Trust Property means that Private Residence Exemption will be available upon the survivor's death, providing the children with a "tax free" uplift.

Income Tax - whilst the Trust comprises only the family home, no income will be produced that would trigger a liability to tax. If the property is sold however and the survivor elects to instead receive an income from the sale proceeds (choosing not to reinvest in an alternative property) they will be taxed at either basic or higher rates (depending upon their personal tax status) or if a non tax payer, can reclaim any tax deducted at source on the investment portfolio comprised in the Trust.

Please review Back to Basics - Tax Planning Overview for a general consideration of lifetime and death tax planning opportunities.