Life Interest Trust (IPDI)
What is a Life Interest Trust (IPDI)?
A Life Interest Trust (also called an Interest in Possession Trust or IPDI) is a type of trust that gives a named person the right to benefit from income or use assets during their lifetime, while preserving the underlying capital for future beneficiaries.
The underlying capital is preserved and passes to other beneficiaries at the end of the trust.
Trustees may be given power to advance capital to the life tenant, outright or as a loan.
Why it’s used:
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Commonly used to provide for a surviving spouse or civil partner while protecting assets for children or other beneficiaries.
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Prevents assets passing to a new spouse, being lost on divorce, bankruptcy, or used for long-term care fees.
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Useful where spouses want different beneficiaries on second death.
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Can reduce the risk of claims against the estate where a spouse is in long-term care.
Inheritance Tax (IHT)
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Treated as an interest in possession trust.
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For IHT, the life tenant is treated as inheriting the trust assets.
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If the life tenant is a spouse/civil partner, spousal exemption applies, deferring IHT until second death.
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If the trust ends during the life tenant’s lifetime (e.g. on remarriage), the transfer to beneficiaries is a potentially exempt transfer, subject to the 7-year rule.
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No anniversary or exit charges apply.
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IPDIs may be unsuitable for unmarried couples concerned about IHT; alternatives may be better.
Residential Nil Rate Band (RNRB)
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If the life tenant is a spouse/civil partner and the final beneficiaries are direct descendants, RNRB applies on second death.
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If final beneficiaries are not direct descendants, RNRB is not available.
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If the life tenant is a direct descendant, RNRB can apply on the testator’s death.