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:
-
Commonly used to provide for a surviving spouse or civil partner while protecting assets for children or other beneficiaries.
-
Prevents assets passing to a new spouse, being lost on divorce, bankruptcy, or used for long-term care fees.
-
Useful where spouses want different beneficiaries on second death.
-
Can reduce the risk of claims against the estate where a spouse is in long-term care.
​
Inheritance Tax (IHT)
-
Treated as an interest in possession trust.
-
For IHT, the life tenant is treated as inheriting the trust assets.
-
If the life tenant is a spouse/civil partner, spousal exemption applies, deferring IHT until second death.
-
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.
-
No anniversary or exit charges apply.
​
-
IPDIs may be unsuitable for unmarried couples concerned about IHT; alternatives may be better.
​
Residential Nil Rate Band (RNRB)
​
-
If the life tenant is a spouse/civil partner and the final beneficiaries are direct descendants, RNRB applies on second death.
-
If final beneficiaries are not direct descendants, RNRB is not available.
-
If the life tenant is a direct descendant, RNRB can apply on the testator’s death.