Life Interest (IPDI) Vs Flexible Life Interest (FLIT)

The needs of complex families can be quite intricate, especially when each family member has different goals or concerns in mind. These goals often revolve around the inheritance for their children, the timing of the inheritance, and even whether the children will inherit at all. Using a Life Interest of the Residuary Estate can address these complex requirements for several reasons: 

- The surviving spouse becomes the Life Tenant after the first death, entitled to all trust-generated income, and can access the capital at the Trustees' discretion. 

- All Life Interest Trusts allow the use of the Transferrable Nil-Rate Band (TNRB) between spouses. - Each testator can appoint separate beneficiaries. 

- Granting the Trustees the power to advance capital enables second-death Inheritance Tax planning. 

- Assets held in the Trusts are protected from third parties, including future spouses.

Two variations of life interests are available over the Residuary Estate: a simple Life Interest over the Residue, known as an IPDI (Immediate Post Death Interest), and the FLIT (Flexible Life Interest Trust).

In addition to the benefits mentioned above, the IPDI offers the following advantages:

- Executors can claim the Residence Nil-Rate Band (RNRB) on the second death if the main residence is part of the Trust and the ultimate beneficiaries are classified as direct descendants by HMRC. 

- The power to advance or loan capital is optional. 

- Ultimate beneficiaries will inherit absolutely on the second death. 

However, the IPDI cannot offer second death protection if the family has untrustworthy beneficiaries. In such cases, a FLIT may be more suitable. The FLIT offers advantages along with those previously stated: 

- Power to advance capital as standard, which can be advanced to the surviving spouse or the Discretionary Beneficiaries as Potentially Exempt Transfers. 

- The Trust continues as a Discretionary Trust following the death of the Life Tenant, providing protection for the Discretionary Beneficiaries.

It's important to note that the FLIT does not enable the executors to claim the RNRB on the second death if the main residence forms part of the Trust. For the purpose of this article, the term "spouse" also includes civil partners.

Can the Residential Nil Rate Band apply to a discretionary trust?

The Residential Nil Rate Band (RNRB) cannot apply if it is intended that the deceased’s main residence forms part of a discretionary trust and is to remain in the trust for the long term. However, if the trustees of the trust appoint the home out of the trust to direct descendants within two years of the testator’s death, RNRB will then apply. This is due to rules contained in S144 Inheritance Tax Act 1984 which mean that distributions from the trust within two years of death are treated for IHT purposes as if the will had gifted the assets to the beneficiary.