Right to Occupy vs Life Interest vs Discretionary Trust

I am currently drafting a Will and need some guidance.

The testator (divorced) has 3 children from a previous relationship and currently lives with his partner with whom he has a young child. The testator solely owns the main residence worth £700k. His partner also has 3 children from a previous relationship. The testator would like to ensure his partner and young child are looked after if he deceases but he ultimately wants the capital to go to his children only and not his partner or her children.

My understanding is that there would be double inheritance taxation if a life interest or right to occupy was given to his partner. Would a Will directing his estate into a discretionary trust be more suitable? What is the best way to preserve the RNRB?

Many thanks

Ravi Solanki
Strathmore Wills & Estate Planning

You are correct that a life interest/right to occupy will result in IHT both on the testator’s death and on his partner’s death (or a PET if the right to occupation ceases during her lifetime). Some testators will choose to bear this extra IHT to achieve their goal of providing for their partner.

A discretionary trust will often be used as an alternative. The trustees may need to make difficult decisions so choice of trustees will be important. They could allow the partner to occupy the property on a discretionary basis but to obtain the RNRB they will need to appoint assets to the children within two years of death. It may be that some informal arrangement can be found to allow the partner to continue to live at the property whilst it is owned by the children but this option would not offer her true security of tenure.

Of course, if the clients were to marry this would simplify the situation considerably.

Tobias Gleed-Owen
Hewitsons LLP

I assume the partner not married to / not in civil partnership with your client?

A Discretionary Trust cannot preserve the RNRB unless there is an appointment out of the Trust (effectively to vary or confirm that the property passes to the children). For the RNRB to be claimed, there must be a gift to direct descendants and so a Discretionary Trust would not satisfy this.

A potentially simple solution (depending on your client’s feelings on this) is for marriage/CP so that there is no double taxation on the life interest Trust to the spouse/CP. Not the most romantic of gestures, but marriage or CP can be a simple taxation solution.

Philippa Jayne Bavington
Giles Wilson LLP