Family Home Trust UK (2026): Life Interest Trusts, Property Protection and Care Home Fees

A family home trust is an arrangement made in a will where the testator's share of the family home (or all of it) is left on a life interest trust rather than outright to the surviving spouse or another beneficiary: (1) THE STRUCTURE: on the testator's death, their share of the property does not pass to the surviving spouse as an outright gift. Instead it is settled on trust: (a) the LIFE TENANT (usually the surviving spouse or partner) has the right to occupy the property for the rest of their life and to receive any income it produces (e.g. rental income if the property is rented out). The life interest is sometimes called an 'immediate post-death interest' (IPDI) — a special category under IHTA 1984 s.49A; (b) the REMAINDERMEN (usually the children) own the underlying capital — the property itself. They inherit the capital outright when the life tenant dies; (c) the TRUSTEES (typically the surviving spouse together with an adult child or a professional trustee) hold the property on behalf of both groups; (2) EXAMPLE: John and Mary hold 12 Oak Road as tenants in common (50/50). John's will places his 50% share on a life interest trust — Mary has the right to live there for life; John's children from a first marriage inherit the 50% share capital when Mary dies. If John had held as joint tenants instead, Mary would inherit his 50% outright by survivorship and the children from his first marriage would get nothing; (3) VARIANTS — FLEXIBLE TRUSTS: some family home trusts are set up as 'flexible life interest trusts' — the trustees have a power to pay capital to the life tenant from the trust fund if needed (e.g. to pay care home fees; to buy a smaller property if the life tenant wants to downsize). The capital is then replenished or reduced as appropriate; (4) THE IMPORTANT PREREQUISITE: for the deceased to be able to leave their share on trust, the property MUST be held as tenants in common (not joint tenants). If the property is held as joint tenants at the date of death, the surviving joint tenant takes the whole by survivorship — there is no 'share' left for the will to deal with. SEVERING the joint tenancy (before making the will) is an essential first step; (5) WHO USES IT: most commonly in second marriage situations (protecting children from a first marriage); in situations where there is concern about care home fees; in large estates seeking to preserve the property for the family; and where the surviving spouse's own estate may be subject to IHT and there is a desire to keep assets 'outside' the survivor's estate (the trust capital is NOT in the survivor's estate for IHT at the survivor's death).

The IHT analysis of a family home trust depends on whether the life interest qualifies as an 'immediate post-death interest' (IPDI): (1) WHAT IS AN IPDI: under IHTA 1984 s.49A, an 'immediate post-death interest' is an interest in possession in settled property which arises on the death of the testator (or intestate) and to which a person became beneficially entitled as a result of that death. The key features: (a) it arises directly from the death (under the will or intestacy — not by an appointment from a discretionary trust); (b) it comes into existence immediately on death; (c) it is an interest in possession (the life tenant has an immediate entitlement to the income or right to occupy); (2) IHT AT THE FIRST DEATH: where a surviving spouse acquires an IPDI in the trust property, the spouse exemption (IHTA 1984 s.18) applies. The value of the deceased's share in the property settles on the trust — but because the trust has an IPDI in favour of the spouse, the whole value is exempt from IHT under s.18. Result: no IHT at the first death. This is the same outcome as if the property had been left outright to the spouse; (3) IHT AT THE SECOND DEATH (THE LIFE TENANT'S DEATH): when the surviving spouse (the life tenant) dies, the trust property is treated as part of their estate for IHT (IHTA 1984 s.49(1) — the life tenant is treated as beneficially entitled to the capital). The value of the trust property (the deceased's original share, now potentially appreciated) is added to the life tenant's own estate and IHT is calculated on the combined total. The NRB and RNRB (if applicable) are deducted; (4) RNRB AND FAMILY HOME TRUSTS: the RNRB (up to £175,000 per person; frozen to April 2030) is available where the property (or a qualifying substitute property) passes to a 'direct descendant'. If the trust property passes directly to children/grandchildren on the surviving spouse's death (which it will under the trust terms), the RNRB should be available — the children inherit as remaindermen. HMRC takes the view that the RNRB applies because the property passes to direct descendants; (5) THE TNRB: the transferable nil-rate band (IHTA 1984 s.8A) of the first-to-die is also available to the second estate. Combined: up to £1m free of IHT (2 × £325k NRB + 2 × £175k RNRB) for a married couple with a qualifying property leaving to children; (6) COMPARISON WITH DISCRETIONARY TRUST: a discretionary trust (where the trustees have discretion over who benefits) is NOT an IPDI and does NOT qualify for the spouse exemption at first death. It is subject to the 10-yearly periodic charge (up to 6% of the trust's value) and exit charges — making it less IHT-efficient for family home purposes.

Care home fee protection is frequently cited as a reason for setting up a family home trust. The protection is real but has important limitations: (1) HOW THE TRUST PROVIDES PROTECTION IN THEORY: local authorities carry out a financial assessment (means test) before funding residential care. Under the Care Act 2014 regulations, assets BELOW £23,250 (the upper capital threshold in England in 2026) are fully funded by the local authority; between £14,250 and £23,250 there is a contribution; above £23,250 the person must self-fund. The key: only assets OWNED by the person are assessed. The trust capital (the deceased's share of the property) is held on trust and is NOT owned by the surviving spouse outright — only the life interest is in the spouse's name. Therefore, in principle, the trust capital is not included in the means test; (2) THE DELIBERATE DEPRIVATION RISK — CARE ACT 2014 s.70: local authorities have power to treat a person as if they still own an asset that they have deliberately deprived themselves of in order to qualify for local authority care funding. If the local authority can show that: (a) the trust was set up with the intention (or a significant purpose) of avoiding care costs; AND (b) at the time the trust was created, the person needed care or it was reasonably foreseeable that they might need care — then the local authority may assess the person as if they still own the trust capital. The trust does not protect in this situation; (3) WHEN IS DELIBERATE DEPRIVATION TRIGGERED: there is no bright-line test. Relevant factors: (a) age at the time of setting up the trust — if both spouses are over 70 and one already has health issues, deliberate deprivation is more likely to be found; (b) timing — was the trust set up years before any care need arose, or only recently?; (c) the purpose stated in discussions or correspondence; (d) general health at the time of the arrangement. A 45-year-old couple setting up a trust as part of standard estate planning is less likely to face a deliberate deprivation challenge than an 80-year-old with dementia; (4) THE PROPERTY DISREGARD RULE: even without a trust, the family home is DISREGARDED in the means test while a qualifying person continues to live there (e.g. spouse or civil partner; dependent child; elderly or incapacitated relative). The home is only assessed when no qualifying person remains in it; (5) PRACTICAL CONCLUSION: family home trusts can provide care home fee protection where: (a) they are set up well in advance of any care need; (b) the primary motivation was estate planning (second marriage protection; preserving property for children) rather than avoiding care costs; (c) the life tenant is not elderly or in declining health at the time of creation. They should NOT be relied upon as a last-minute shelter from care costs already anticipated.

The trust imposes obligations on the trustees and creates potential friction if the life tenant's needs change: (1) THE TRUSTEES' ROLE: the trustees (who typically include the surviving spouse/life tenant and one or more of the children/remaindermen) must manage the trust property in the interests of BOTH the life tenant and the remaindermen. They must: (a) keep the property insured and maintained; (b) comply with trust law (Trustee Act 2000 standard of care); (c) account to the remaindermen for the trust; (d) not sell the property without proper authority; (2) THE LIFE TENANT'S RIGHT TO OCCUPY: the life tenant has a right to occupy the trust property. TOLATA 1996 s.12 applies — the life tenant can occupy the property as of right (the trust's purpose is to make it available for them). The remaindermen cannot force the life tenant out. However, the life tenant must keep the property in good repair, pay outgoings (rates, utilities, insurance) and not do anything that reduces the value of the capital (waste); (3) IF THE LIFE TENANT WANTS TO MOVE: if the life tenant wishes to sell and move to a smaller property: (a) the trustees (including the remaindermen trustees) must agree to the sale; (b) the proceeds of sale are held on the same trusts — the trust fund is now represented by the cash proceeds or the new property; (c) if the new property costs less than the old one, the surplus is held on the same trusts (it remains trust capital, not the life tenant's property); (d) if the new property costs more, the trust capital and the life tenant's own funds can be combined — with proper accounting; (4) IF THE LIFE TENANT MOVES INTO CARE: when the life tenant can no longer occupy the property (due to going into care; moving to a relative's home; any other reason), the trust fund no longer serves its purpose as a home. The trustees may let the property — rental income accrues to the life tenant. They may sell the property and reinvest in an alternative investment; (5) TRUSTEE DISPUTES: if the trustees cannot agree (e.g. the child-remainderman trustee refuses to agree to a sale; the life tenant refuses to vacate for a sale), either side can apply to court under TOLATA 1996 s.14. The court will consider the purpose of the trust and the interests of all parties.

The tax treatment of a family home trust on creation and thereafter is broadly favourable — no SDLT on creation; special CGT rules: (1) SDLT ON CREATION OF THE TRUST: the creation of a life interest trust in a will is NOT a land transaction for SDLT purposes. The transfer of the deceased's share into the trust happens by operation of the will — not by a land transaction. FA 2003 Schedule 3, paragraph 3A exempts such dispositions. No SDLT is payable and no SDLT return is required when the trust is established; (2) SDLT IF PROPERTY IS TRANSFERRED OUT OF THE TRUST: if the property is later assented or transferred out of the trust to a beneficiary (e.g. when the life tenant dies and the remaindermen become absolutely entitled), this is also exempt from SDLT under the trust rules in FA 2003 Schedule 3, para 3A — provided it is a conveyance or transfer pursuant to a will or intestacy; (3) CGT ON THE CREATION OF THE TRUST: there is no CGT charge when the trust is created. The assets are treated as acquired at market value at the date of death (TCGA 1992 s.62) — the trust inherits that base cost. No immediate CGT liability arises; (4) CGT DURING THE TRUST: if the trustees sell the property (e.g. to allow the life tenant to move), CGT is calculated on the gain from the probate value to the sale price. The trustees are entitled to the annual exempt amount for trusts (currently £1,500 — significantly reduced from the previous £3,000 and historic £12,300). Principal private residence (PPR) relief may be available if the life tenant occupies the property as their main residence — HMRC accepts that the life tenant's occupation satisfies the conditions for PPR relief in the trust; (5) CGT WHEN THE LIFE TENANT DIES: on the death of the life tenant, the trust property is deemed to be disposed of at market value by the life tenant (IHTA 1984 s.49(1) and TCGA 1992 s.73). This triggers a deemed CGT disposal at death. HOWEVER: TCGA 1992 s.73(1)(a) provides that the deemed CGT disposal on death does NOT give rise to an actual CGT charge (there is a CGT 'uplift' to market value at the date of the life tenant's death). The remaindermen inherit the property at its value at the life tenant's death — their future CGT base cost is the value at the date of the life tenant's death; (6) PPR RELIEF ON SALE BY REMAINDERMEN: when the remaindermen sell the property after inheriting it, they can only claim PPR relief for periods of their own occupation. The life tenant's period of occupation does not transmit to the remaindermen.