What is a Right of Residence Trust?
The Right of Residence Trust (ROR) is a form of Immediate Post-Death Interest (IPDI) Trust incorporated into a Will. The ROR allows the testator to give a chosen beneficiary a right to reside in a specified property either for their lifetime or for a specific time period. This beneficiary is called the occupant, and they never own the property absolutely: they only have the right to live in it for the chosen duration or until a specified event. When the occupant no longer has the right to benefit from the property – when they die, move out, or when the trust ends – the property passes on to beneficiaries known as remaindermen. These beneficiaries are named in the will at the outset.
In what circumstances would you advise a RoR Trust?
This trust is often used when a client wishes for a particular person to have a right to live in a given property without them ever owning the asset absolutely. For example, a client living with an elderly relative might not want that relative to become homeless should they outlive the client, but still wish for their own children to ultimately inherit the property. A right of residence trust could accommodate this.
Similarly, a client living in their solely owned property with their partner may wish to use a right to reside to enable the partner to continue living in the property for a given period, while still protecting the capital for other beneficiaries. In these or similar situations, the occupant does not have the right to sell the property. If they move out, the trust ends and the property passes to the remaindermen.
The trust can also be drafted to terminate in accordance with the testator’s wishes: e.g., a set period of years, until children attain a certain age, or until the occupant remarries. Where the client wishes to grant such temporary occupancy to another, a RoR trust is often appropriate.
Key features of the RoR Trust
The RoR Trust provides an interest in the main residence for the chosen occupant.
At least two Trustees are required. Careful thought should be made as to who may be the most appropriate as they will have to work harmoniously with each other and the occupant. If appropriate, the occupant may also be a trustee.
The RoR Trust is only for one property. If a client is interested in extending the occupant’s interest so that it covers multiple properties, then they will need to consider the use of multiple Life Interest Trusts or the Flexible Life Interest Trust.
As noted, the occupant never owns the trust property absolutely and has no right to dispose of trust property.
The property in trust is held for the remaindermen; these beneficiaries are named in the will that creates the RoR trust.
he occupant is responsible for keeping the property in good repair, insuring the property, and paying all outgoings arising.
The RoR can be terminated early by agreement of the occupant of the trustees. For example, if the occupant no longer requires the right of residence owing to securing their own accommodation, the trust assets can be distributed to remaindermen.
Unlike with a PPT or FLIT, the occupant of a RoR has no right to downsize or change properties. If they move out, then the trust terminates, and the property passes to the remaindermen absolutely.
Tax Treatment
Assets passing into a RoR Trust will be chargeable to inheritance tax unless the occupant is an exempt beneficiary, such as a spouse or civil partner of the testator.
Although the occupant does not own the property absolutely, they are deemed to own it for the purposes of inheritance tax (“interest in possession”).
If a RoR is given to a non-spouse/civil partner of the testator, then inheritance tax may be charged twice on the property before it passes down a generation to children. That is, the property will be taxed once when the testator dies and it passes into trust, and again when the occupant dies and the trust assets aggregate with their death estate.
Property subject to a RoR could qualify for the residence nil rate band on the testator’s death, provided that the occupant is a lineal descendant. On the occupant’s death, the remaindermen would have to be lineal descendants of the occupant for the property to qualify.
