Many people consider the use of a liferent in their Will, and there are many reasons for doing so – it is one way to look after loved ones while also protecting family assets. Andrew Ritchie, Associate in our Private Client team explains how a liferent works and why you might consider it beneficial for your circumstances.
The liferent creates two interests in an asset:
- The liferenter - who is entitled to the income produced by the asset
- The ultimate beneficiary - who is entitled to receive the capital at the end of the liferent, typically on the death of the liferenter but can be earlier.
With a financial asset, this means the liferenter receives the income generated by the asset, such as interest or dividends, with the ultimate beneficiary receiving the underlying capital only at the end of the liferent.
Liferents often involve a house which works differently - the liferenter is entitled to live in the house rent-free for life, and the ultimate beneficiary gets the house when the liferenter passes away.
This can, therefore, be a useful device to balance the interests of beneficiaries under the Will and to provide an element of asset protection. For example, say Mr A is married for a second time and has children from his first marriage, he may decide to balance the interests in his Will by leaving his spouse the liferent of the matrimonial home, whilst nominating his children as the ultimate beneficiaries. This ensures that his spouse has a roof over their head for the duration of their lifetime while preserving the house for his own children. On the subsequent death of the spouse, the house does not form part of the spouse’s estate and therefore there is no risk of it going to the spouse’s family to the detriment of Mr A’s children.
Key points to consider:
- The liferent is a type of trust - it needs to be registered with HMRC. Note that, during the liferent, legal ownership of the asset remains with the trustees under the Will, and they are responsible for registration with HMRC.
- What if an ultimate beneficiary dies before the liferent ends? Will that person’s share of the capital go to their children perhaps, or will it go to the surviving ultimate beneficiaries?
- Choose trustees with great care - They will have significant responsibilities to fulfil during the term of the trust, which could last decades. In considering the investment of funds, they will need to balance the interests of the liferenter (by generating income) with those of the ultimate beneficiaries (by preservation and hopefully growth of capital). This will invariably require professional financial advice. Note that the trustees will very often be the same people as the executors under the Will.
- If the liferent involves a house, think about:
(i) Who is to be responsible for maintenance of the house, internal and external? Often this will be the liferenter but you need to be clear. Alternatively, you could provide in your will for part of your estate to be ringfenced as a cash float to cover repairs and maintenance.
(ii) Buildings insurance – who is to arrange it and pay the premiums? The trustees under the Will remain the legal owners, so typically they will retain the right to arrange insurance and recoup the premium from the liferenter.
(iii) What happens if the liferenter wants to move house? In the example above, Mr A might provide that the liferent is restricted to the house he owns when he dies, in which case, if his spouse subsequently wanted to move, the liferent would terminate. Or he could say the liferent can be carried forward to a new house. However, what happens to any surplus should the new house cost less? Does it continue to form part of the liferent (i.e. the spouse now receives the income generated by it) or can it be given to the ultimate beneficiaries at that time?
(iv) What happens if the liferenter has to vacate the house and go into residential care permanently? It is also a good idea for the liferenter to have a Power of Attorney in place so the liferent can be managed if the liferenter has lost legal capacity and gone into care.
5. There are potential Inheritance Tax (IHT) consequences with liferent trusts, which should be discussed in detail with your
solicitor.
6. It is crucial that the title to your home is checked if you are considering incorporating a liferent trust in your Will, to ensure that that liferent provision would work upon your death. This is something your solicitor can easily help with.
Liferent trusts can be a thoughtful and practical way of controlling who inherits your estate on your death. If you would like to discuss including a liferent trust provision in your Will, please do not hesitate to contact a member of our Private Client team.
