Interest in Possession Trust Explained

An interest in possession trust is a trust where one beneficiary has the present right to the trust's income, or to use its assets, as they arise, while other beneficiaries are entitled to the capital at a later point. The person entitled to the income is often called the life tenant.

These trusts are a common tool in wills, particularly where someone wants to provide for a current partner during their lifetime while making sure children eventually inherit. This guide explains the roles involved, how income tax and inheritance tax apply, and where an interest in possession trust sits alongside other structures. It forms part of our wider Trusts Explained hub and our estate planning guide. Figures are current as at July 2026 and are subject to change.

What is an interest in possession trust?

An interest in possession trust is one where the trustee must pass all the trust income to a named beneficiary as it arises, after expenses, or give that person the right to use trust assets such as a home (gov.uk, types of trust, as at July 2026). That income beneficiary has an "interest in possession", meaning a present right to enjoy the trust, but no automatic right to the underlying capital. The capital is held for others.

The life tenant and the remaindermen

An interest in possession trust usually separates the benefit of an asset into two parts held by different people. Understanding those roles is the key to how these trusts behave. One person enjoys the asset now, and others receive it later, which is why they are frequently used to balance the needs of a surviving partner against the eventual inheritance of children.

The life tenant. The beneficiary with the interest in possession. They receive the income, or the right to live in a property, for a defined period, often for the rest of their life.
The remaindermen. The beneficiaries entitled to the capital once the life tenant's interest ends, commonly the settlor's children.
The trustees. The people who legally hold and manage the assets, collect income, and pass it to the life tenant under the trust's terms.
The settlor. The person who set the trust up, whether during their lifetime or through their will.

Common uses of an interest in possession trust

Interest in possession trusts tend to be chosen where someone wants to provide for one person for life without giving that person the capital outright. This is a familiar situation in blended families, and it is one reason many people consider this structure when writing a will. The trust separates the right to use an asset from the right to eventually own it.

Second marriages and blended families. A common option some consider is letting a surviving spouse live in the family home or receive investment income for life, with the property then passing to children from an earlier relationship.
Protecting an inheritance for children. The capital is preserved for the remaindermen rather than passing under the life tenant's own will.
Providing an income stream. The life tenant receives income from investments without control over how the capital is ultimately distributed.

Life interest trust or interest in possession trust? These terms often describe the same thing. A "life interest trust" is simply an interest in possession trust where the life tenant's interest lasts for their lifetime. When such a trust is created by a will and takes effect on death, it is generally an immediate post-death interest, which carries its own inheritance tax treatment (gov.uk, trusts and inheritance tax, as at July 2026, subject to change).

Income type	Trustee rate (July 2026)
Dividend income	8.75%
All other income (rent, interest)	20%

Interest in possession trusts and inheritance tax

Inheritance tax treatment depends heavily on when and how the trust was created, and this is the area where these trusts are most often misunderstood. A key dividing line is 22 March 2006. Where a life tenant has a qualifying interest in possession, the trust assets are generally treated as part of that person's estate for inheritance tax when their interest ends, rather than sitting in the separate "relevant property" regime (gov.uk, trusts and inheritance tax, as at July 2026, subject to change).

Since 22 March 2006, only certain interest in possession trusts are treated this way. These include an immediate post-death interest set up by a will or intestacy, a disabled person's interest, and a transitional serial interest. Many lifetime interest in possession trusts created after that date instead fall into the relevant property regime, where periodic ten-year charges and exit charges can apply (gov.uk, as at July 2026, subject to change).

Where the trust holds a home that the life tenant has the right to occupy, that home is generally included in the life tenant's estate on death (gov.uk, as at July 2026). The standard inheritance tax rate is 40%, charged only on the part of an estate above the available tax-free thresholds, with a reduced rate of 36% where at least 10% of the net estate passes to charity (gov.uk, as at July 2026, subject to change).

Allowance or rate	Level (July 2026)
Nil-rate band	£325,000
Residence nil-rate band	Up to £175,000
Standard rate	40%
Reduced rate (10%+ to charity)	36%
Taper threshold	£2,000,000

Source: gov.uk/inheritance-tax. These thresholds are fixed until the end of the 2030-31 tax year (5 April 2031) (gov.uk), subject to change. Transfers between spouses and civil partners are generally exempt, and unused thresholds can transfer to the survivor.

A worked example (illustration only). Say a man leaves his home, worth £400,000, in a life interest trust created by his will, giving his second wife the right to live there for the rest of her life, with the property then passing to his two children. Because this is an immediate post-death interest, the home is generally treated as part of his wife's estate for inheritance tax when she dies, not his children's, even though they eventually inherit it (gov.uk, as at July 2026, subject to change). Whether tax is due then depends on her own estate and the thresholds available at that time. Every estate is different, so this is general information rather than a calculation for any particular situation.

An interest in possession trust fixes who receives the income now and who receives the capital later. A bare trust is simpler still, holding assets absolutely for a named beneficiary who is entitled to both income and capital. A discretionary trust gives trustees the flexibility to decide which beneficiaries receive what, and when, but is generally taxed differently and can carry ten-year and exit charges.

Feature	Interest in possession	Bare trust	Discretionary
Who gets income	The life tenant, by right	The named beneficiary	At trustees' discretion
Who gets capital	The remaindermen, later	The named beneficiary	At trustees' discretion
Trustee flexibility	Limited	Very limited	High
Trustee dividend rate	8.75%	Beneficiary is taxed	Higher trust rate

Trust income tax rates from gov.uk/trusts-taxes, as at July 2026, subject to change. For a bare trust, the beneficiary is generally taxed on the income directly.

Setting one up: what it involves

An interest in possession trust can be created during someone's lifetime or, more commonly, through a will so that it takes effect on death. Because the inheritance tax treatment turns on how and when it is set up, many people choose to take advice before putting one in place. The general steps below are for illustration and are not a substitute for tailored guidance from a qualified professional.

Define the roles

Decide who the life tenant will be, who the remaindermen are, and who will act as trustees.

Draft the trust

Set out the terms in a trust deed or within a will, often with a solicitor or STEP practitioner.

III

Register where required

Many trusts must be registered with HMRC's Trust Registration Service, depending on the type.

Administer and review

Trustees manage the assets, pass income to the life tenant, and account for tax each year.

Interest in possession trusts in Scotland and Northern Ireland

This guide describes the law of England and Wales. The concept of an interest in possession is used across the UK for tax purposes, because inheritance tax and income tax are UK-wide. However, the underlying trust and succession law differs. Scotland has its own law of trusts and succession, including legal rights that can entitle a spouse and children to a fixed share of an estate, which can interact with a life interest arrangement. Northern Ireland has a separate but broadly similar system to England and Wales. Where an estate touches more than one jurisdiction, it can be worth taking advice in each.

Frequently asked questions

What is an interest in possession trust in simple terms?

It is a trust where one person, the life tenant, has the right to the income or to use the assets as they arise, while others, the remaindermen, are entitled to the capital later (gov.uk, as at July 2026). It separates the right to enjoy an asset now from the right to eventually own it, which is why it is often used in wills.

Who pays the tax on an interest in possession trust?

Trustees generally pay income tax on the trust's income at 20% on non-dividend income and 8.75% on dividends (gov.uk, as at July 2026, subject to change). The life tenant then accounts for that income according to their own tax position and may reclaim tax or owe more. Because circumstances differ, this is generally worth checking with a qualified professional.

Is an interest in possession trust included in the life tenant's estate?

Often, yes. Where the life tenant has a qualifying interest, such as an immediate post-death interest, the trust assets are generally treated as part of their estate for inheritance tax when their interest ends (gov.uk, as at July 2026, subject to change). The treatment depends on when and how the trust was set up, particularly around the 22 March 2006 rules.

What is the difference between an interest in possession and a discretionary trust?

In an interest in possession trust, the life tenant has a right to the income. In a discretionary trust, the trustees decide which beneficiaries receive income or capital, and when. The two are generally taxed differently, and discretionary trusts can carry ten-year anniversary and exit charges (gov.uk, as at July 2026, subject to change).

Is a life interest trust the same as an interest in possession trust?

In most cases, yes. A life interest trust is an interest in possession trust where the life tenant's right lasts for their lifetime. When set up by a will and taking effect on death, it is generally an immediate post-death interest, which has its own inheritance tax treatment (gov.uk, as at July 2026, subject to change). The terms are often used interchangeably.

Can the life tenant sell the trust property?

Not on their own. The trustees hold legal title and manage the assets, so a sale is generally their decision under the trust's terms, taking account of both the life tenant and the remaindermen. A life tenant typically has the right to the income or to occupy a property, not to sell the underlying capital. Where this arises, it can be worth taking advice from a qualified professional.

About Fairchild Oldfield

The Fairchild Oldfield team brings together estate planning, tax, independent financial advice and client care, working with families across England and Wales.

Fairchild Oldfield are estate planning specialists and will writers, not a firm of solicitors. This article is general information based on practical experience, not legal, tax or financial advice.

Important: This article is general information only and is not legal, tax or financial advice. Reading it does not create a professional relationship. It is based on the law of England and Wales, and other UK jurisdictions may differ. Figures and rules are current as at July 2026 and are subject to change. Before acting, many people choose to seek advice from a suitably qualified professional, such as a solicitor, a STEP practitioner, an accountant, or an FCA-authorised financial adviser, who can consider your individual circumstances.

Interest in Possession Trusts Explained