Flexible Life Interest Trust UK: How It Works, Tax Treatment and When to Use One

A flexible life interest trust (FLIT) is a trust in which one person — the life tenant — has a right to the income generated by the trust assets during their lifetime, but in which the trustees also have a discretionary power to advance capital to the life tenant or to other named beneficiaries (known as the remaindermen). The word 'flexible' refers to this capital power: unlike a fixed life interest trust, where the life tenant receives only income and the capital passes intact to the remaindermen on the life tenant's death, a FLIT permits the trustees to dip into capital when circumstances justify it. FIXED LIFE INTEREST TRUST: the life tenant is entitled to all income as it arises. On the life tenant's death the capital passes to the remaindermen automatically. Trustees have no discretion to vary this arrangement (unless the trust deed confers specific additional powers). FLEXIBLE LIFE INTEREST TRUST: the life tenant still receives income as a right, but the deed also grants trustees express power to advance capital — whether to the life tenant for their needs, or to the remaindermen — and sometimes power to appoint the trust fund away from the life tenant entirely, turning the interest into a discretionary trust. This flexibility means the trust can adapt to changing circumstances (illness, long-term care needs, a change in the remaindermen's financial position) without court intervention. IN ESTATE PLANNING: most modern will trusts described as 'life interest trusts' or 'protective property trusts' are in fact FLITs — the trust gives the surviving spouse income from the trust fund (typically the half-share of the family home) and trustees (often the adult children) have power to advance capital for the survivor's needs, including care home fees. This combination gives the survivor security while ring-fencing capital for the next generation.

FLITs are used in a wide range of estate planning contexts. The most common situations are: SECOND MARRIAGES AND BLENDED FAMILIES: the classic use case. A person with children from a first marriage (or relationship) remarries. They want to provide fully for their new spouse after death, but they also want to ensure their children from the first marriage inherit in due course. A FLIT in the will achieves both: the new spouse receives the trust income (and possibly capital if needed for care or other exceptional needs), and on the spouse's death the trust capital passes to the children. Without a trust, if everything passes to the new spouse outright, the new spouse could (and legally may) change their own will to leave everything to their own children or a new partner. CARE HOME PROTECTION: the half-share of the matrimonial home is held in a FLIT. If the surviving spouse needs care, only the survivor's own half-share is available for a means test; the trust half belongs to the trust and is not directly the survivor's asset. Councils must carry out a proper assessment, and the trust's capital is generally not immediately available to meet care fees (although trustees should take advice as the position is not absolute). INHERITANCE TAX PLANNING: by directing assets into a FLIT rather than passing outright to a surviving spouse, the testator uses their nil-rate band on the first death (because the trust is a chargeable transfer, but one that does not exceed the NRB). This 'freezes' NRB use on first death and avoids the transferable nil-rate band mechanism — for larger estates, this can be advantageous if asset values are expected to rise. PROTECTING VULNERABLE BENEFICIARIES: a FLIT can give an adult child with learning disabilities or mental illness an income interest while trustees manage the capital and have power to pay for care costs, housing, or other needs. SETTLOR-INTERESTED TRUSTS: if the settlor retains a benefit (e.g., they are also the life tenant), specific anti-avoidance rules apply for income tax, CGT, and IHT — professional advice is essential.

The IHT treatment depends on when the trust was created, who benefits, and whether the life tenant has a qualifying interest in possession. FOR TRUSTS CREATED ON DEATH (WILL TRUSTS): an 'immediate post-death interest' (IPDI) arises when a will creates an interest in possession trust in favour of an individual (typically the surviving spouse) and that individual becomes beneficially entitled to the income immediately on the testator's death. An IPDI is treated as an interest in possession for IHT purposes — the life tenant is treated as owning the trust assets outright. This means: (1) the assets are within the life tenant's estate for IHT (if the life tenant is not the testator's spouse, they will be taxable on the life tenant's death); (2) if the life tenant IS the testator's surviving spouse or civil partner, the assets qualify for spousal exemption — no IHT on first death regardless of trust size; (3) on the life tenant's death, the capital is distributed to the remaindermen and IHT is charged on the trust value as if it formed part of the life tenant's estate. FOR TRUSTS CREATED DURING LIFETIME: the original gift into trust is a potentially exempt transfer (PET) if the settlor is not a beneficiary, or a chargeable lifetime transfer (CLT) if the trust is a discretionary trust. Where the settlor retains an interest (e.g., they are the life tenant), the gift-with-reservation-of-benefit rules apply and the assets remain in the settlor's estate for IHT throughout their lifetime. FLEXIBLE POWERS AND IHT: if the FLIT contains a power to terminate the life interest and convert to a discretionary trust, exercising that power is itself a disposal for IHT — the existing interest in possession ends, triggering an IHT charge at the time of the appointment. Trustees must check the IHT position before exercising any power to appoint assets away from the life tenant.

CAPITAL GAINS TAX: when assets are transferred into a lifetime FLIT, the settlor disposes of them at market value for CGT purposes. If the assets are business assets or certain other qualifying property, holdover relief under TCGA 1992 s.165 may be claimed — the gain is deferred until the trustees eventually sell. For non-business assets transferred during lifetime, there is a CGT charge on the settlor immediately (unless holdover relief is available under s.260, which requires a chargeable IHT event). Assets transferred on death (via a will FLIT) are uplifted to probate value — there is no CGT charge on death. Trustees pay CGT at the trust rate (currently 20% for most assets, 24% for residential property) on gains above the trust's annual exempt amount (£1,500 for 2025/26). The trust's annual exempt amount is split between trusts created by the same settlor if more than two exist. INCOME TAX: the life tenant is entitled to all trust income as it arises. Income is taxed on the life tenant at their personal income tax rates — not at the trust rate. Trustees collect the income and pass it to the life tenant; if they have already suffered tax at source (e.g., dividend tax credits, savings income basic rate), the life tenant can reclaim excess tax or pay additional tax depending on their position. Unlike discretionary trusts, there is no 45% trust rate on income in an interest in possession trust — the life tenant's own rates apply. CAPITAL ADVANCES: when trustees exercise their discretion to advance capital to the life tenant, there is no income tax charge on the capital itself (it is capital, not income). However, if the capital has grown since acquisition, the trustees may crystallise a CGT gain on disposal — trustees should account for this before making a large capital advance.

A flexible life interest trust is created by the will itself — it comes into effect on the testator's death, not before. There is no separate trust deed to register during the testator's lifetime (unlike a lifetime trust). The key drafting elements are: (1) IDENTIFICATION OF TRUST PROPERTY: the will specifies which assets form the trust fund — commonly the testator's share of the matrimonial home (when held as tenants in common), or the residuary estate, or a specific monetary or asset class gift. (2) LIFE TENANT: the person who is entitled to the income (and who may occupy any residential property in the trust) — typically the surviving spouse or civil partner. (3) TRUSTEES: usually two or three named individuals (often adult children from a first marriage) or a professional trustee. The trustees hold the legal title to trust assets. (4) REMAINDERMEN: the beneficiaries who take the trust capital on the life tenant's death — the testator's children, grandchildren, or other named persons. (5) INCOME ENTITLEMENT: the deed states that the life tenant is entitled to all net income as it arises. For a property trust where no income is generated, the deed should include a right to occupy the property rent-free. (6) CAPITAL ADVANCEMENT POWER: the flexible element — an express power for trustees to advance capital to the life tenant for their needs (typically healthcare, care home fees, major repairs), and sometimes power to pay capital to remaindermen absolutely before the life tenant's death. (7) TRUST REGISTRATION SERVICE: since October 2022 all express trusts (including will trusts) must be registered on HMRC's Trust Registration Service within 90 days of creation. The trustees are responsible for registration. SOLICITOR RECOMMENDATION: the drafting of a FLIT requires careful attention to IHT, CGT, and income tax. A solicitor specialising in wills and trusts should draft the will. WillSafe UK's will kit is suitable for simpler estates; for FLIT provisions we recommend legal advice.

On the death of the life tenant, the flexible life interest trust terminates and the capital passes to the remaindermen according to the terms of the trust deed. THE IHT CHARGE ON TERMINATION: the trust assets are treated as part of the life tenant's estate for IHT purposes (because the life tenant had an interest in possession). IHT is calculated as if the life tenant had owned those assets outright — they form part of the 'deemed estate'. The trustees are responsible for reporting the trust assets on IHT400 (and completing the relevant supplementary schedule IHT418 for property held in trust) and for paying the IHT due from trust funds before distributing to remaindermen. SURVIVING SPOUSE EXEMPTION: if the life tenant was the testator's surviving spouse and the remaindermen are third parties (not the spouse's estate), IHT is payable at that point on the trust value. The spouse's own nil-rate band and any transferable NRB from their own pre-deceased spouse may reduce or eliminate the charge. DISTRIBUTION TO REMAINDERMEN: once IHT and administration costs are settled, the trustees transfer the trust assets to the remaindermen. For a property held in trust, this requires a formal conveyance or assent. The remaindermen's CGT base cost is the market value at the date of the life tenant's death (another uplift). TRUST ACCOUNTS: trustees should maintain proper trust accounts throughout the trust's life and prepare a final account on termination. Beneficiaries are entitled to see these accounts. TRUST REGISTRATION SERVICE: the TRS registration should be updated to reflect the trust's winding up.