13/05/2026
Life Interest Trust or Right to Occupy? Understanding the Difference - and the Tax Consequences
When preparing a Will, particularly in the context of second marriages or blended families, two frequently considered options are a life interest trust and a right to occupy. While they can appear similar in practical effect - often allowing a surviving spouse or partner to remain living in a property - they are not identical in legal structure or tax treatment. The distinction lies not in the label used, but in how the provision is drafted.
A life interest trust (commonly an Immediate Post-Death Interest) gives a named beneficiary a formal legal entitlement to benefit from trust assets during their lifetime. This typically includes the right to occupy a property and, where applicable, to receive income from other trust assets. The capital is preserved for ultimate beneficiaries, such as children, after the life tenant's death. A right to occupy, by contrast, is often narrower in scope. In most professionally drafted Wills, a right to occupy is implemented through trustees holding the property for the ultimate beneficiaries, subject to the surviving spouse's right to reside there. In those circumstances, it will usually constitute an interest in possession, and therefore operate as a form of trust. However, if drafted more loosely - for example, as a personal permission or without clear trust provisions - the legal and tax consequences may differ. The outcome depends entirely on the drafting. From a tax perspective, this is significant.
A properly structured life interest trust for a surviving spouse will normally qualify for the spouse exemption for Inheritance Tax on first death, meaning no IHT is payable at that stage. The trust assets are then treated as part of the surviving spouse's estate for IHT purposes on their death. A right to occupy can achieve the same result if it amounts to a qualifying interest in possession. However, if it does not meet those requirements, it may fall within the relevant property regime, potentially exposing the trust to periodic or exit charges. Capital Gains Tax treatment can also vary depending on how the arrangement is structured and whether principal private residence relief applies.
At Christchurch Solicitors LLP, we ensure that clients understand not just the terminology, but the legal and tax consequences of each option at the drafting stage. What may appear to be a subtle difference in wording can materially affect the protection afforded to a surviving spouse and the tax efficiency of the estate. Careful, specialist drafting ensures that both family security and fiscal prudence are properly balanced.
Contact us on 01473 355160 to discuss preparing your Will or email us at [email protected] g to arrange an appointment.
