Life Interest or Right to Reside?

Rights to reside and life interests can often be mistaken as interchangeable estate planning strategies and understandably so. On the surface, they appear to be almost identical. Both are created by the terms of a deceased’s Will. Both create a temporary interest that allows a surviving spouse, partner or family member to remain in a home after the testator’s death without transferring actual ownership. Both are used to preserve real property for their remaining beneficiaries.

However, they operate in very different ways, and the choice between them can affect tax outcomes, beneficiary rights and estate administration. For that reason, understanding how each option works, what rights they create and when they should be used is critical when drafting a Will.

What is a Right to Reside?

A right to reside allows a person to live in a particular property for a specified period or until a particular event occurs, without giving them ownership of the property. It is limited to occupation only, in the sense that the beneficiary may live in the property but does not receive broader rights to sell it, rent it out or otherwise deal with it as an owner.

Whether a clause creates a right to reside depends on the wording of the Will and the intentions of the person who made it. In most cases, wording that allows someone “to reside” or “to live” in a property will be interpreted as giving them a personal right to live there, rather than a proprietary interest.[1]

Because it is a personal right, it generally cannot be transferred to someone else. The right will often end when the occupant permanently leaves the property, dies, or another event specified in the Will occurs.

What is a Life Interest?

Instead of simply giving a person permission to live in a property, a life interest gives them a recognised interest in the property itself for the duration of their life. The person holding the life interest is entitled to use and enjoy the property during their lifetime but does not own it absolutely.

A life interest only arises when there is clear and unambiguous provision in a Will expressly stating the testator’s intention to grant a proprietary interest for life.[2]

What’s the Difference?

Life interests and rights to reside are often used in blended family estate planning. A testator may want to give a surviving de facto spouse long-term housing security, while still ensuring the property ultimately passes to their children. On the surface, both mechanisms may appear to achieve that outcome. In practice, however, they create very different rights and very different risks.

The key distinction lies in the scope of the rights conferred. A life interest creates a proprietary interest, whereas a right to reside creates a personal right. It is difficult to define these powers in a strict sense as they are wholly dependent on the terms of the Will which gives them life.

Generally speaking, a life tenant will generally have broader rights than the holder of a mere right to reside. Those rights may include occupying the property, receiving income from it or otherwise dealing with their limited interest. A right to reside is narrower in scope. It is directed to personal occupation, not broader control or economic use of the property.

The events that bring each arrangement to an end are also important to consider. A right to reside can be drafted to end on death, remarriage, failure to pay rates or outgoings or if the beneficiary permanently stops living in the property. By contrast, a life interest will generally only end when the beneficiary dies or willingly surrenders the interest. This can operate as both an advantage and a disadvantage. If a dispute arises between the beneficiary granted the interest and the remainder beneficiaries who will ultimately receive the property, a life interest may provide greater certainty and enforceability than a right to reside, which is slightly easier to terminate.

Interestingly, whereas a right to reside can be drafted so that it ceases to exist upon the beneficiary failing to pay rates or to maintain the property, the failure of a life tenant to comply with a similar maintenance condition does not automatically result in a forfeiture of the life interest (though enforceable equitable obligations may arise).[3] Testators wishing to ensure that a property is kept in good condition for their remaining beneficiaries after the death of the holder of the life interest may therefore prefer the option of a right to reside for this very reason.

Further, the surrender of a life interest can create its own complications. If a life interest is surrendered, the ATO treats that surrender as the disposal of a CGT asset, which may give rise to capital gains tax consequences.

The Hidden Pitfall: Land Tax and Life Interests

Land tax is where the distinction between a right to reside and a life interest can become especially important. Although the issue is often overlooked during estate planning, the consequences can be significant once the estate is being administered.

Section 23 of the Land Tax Act 2010 (Qld) provides specific rules for land held within a deceased estate. Where land is owned by an executor or trustee when land tax liability arises, the executor may request that the Commissioner of State Revenue assess the relevant beneficiaries as though they were the owners of the land.

Importantly, a “relevant beneficiary” includes a beneficiary who has an interest in the land. A life tenant possesses a recognised interest in land and is treated as an owner for land tax purposes. As a result, a beneficiary holding a life interest may become the person assessed for land tax in respect of the property.

By contrast, a mere right to reside generally does not constitute an interest in land. Because the right being transferred is personal rather than proprietary, the holder of a right to reside will not ordinarily fall within the same land tax provisions and would not be assessable for land tax in respect of the property.

Where a right to occupy is granted, the estate bears the land tax liability.

The Income Tax Problem

A life interest will also produce vastly different tax outcomes that a right to reside.

A life interest is recognised for tax purposes as a CGT asset in its own right; whereas a right to occupy is not.

The key taxation difference occurs where the arrangement comes to an end early.

If a life interest is surrendered early, the surrender is treated as the disposal of a CGT asset. The life tenant may realise a capital gain based on the proceeds received for the surrender – or if no proceeds are received, based on the market value of the life interest.

If a right to occupy is surrendered early, in contrast, no taxation consequences typically arise.

Which is Better?

The answer is that both mechanisms can produce a similar practical outcome, but they do so in very different ways. The drafting choice should therefore be driven by the client’s objectives, the intended beneficiary’s circumstances, the nature of the property and the tax and administration consequences that may follow.

The best option will always depend on the individual facts of each estate. However, in most cases, a carefully drafted right to reside will be simpler and more flexible than a life interest. It is easier to manage from an estate administration perspective, carries fewer tax consequences and is arguably less likely to result in a dispute between the holder of the right to reside and the other beneficiaries of the estate.

Life interests can be cumbersome, inflexible and administratively demanding. For that reason, many estate planning practitioners prefer a well-drafted right to reside where the objective is simply to give a beneficiary housing security without creating unnecessary complexity.

Key Takeaways

When drafting a Will, the choice between a right to reside and a life interest should never be treated as a matter of terminology. Although both arrangements may allow a beneficiary to remain in a property without granting legal ownership, they create fundamentally different legal rights and can produce very different legal, tax and practical outcomes.

Careful drafting is essential. A clause intended to provide simple occupation rights can inadvertently create a proprietary interest if worded incorrectly, while a deliberately created life interest may carry taxation and administrative consequences that should be considered in advance. Understanding the distinction helps avoid unexpected liabilities, reduce the scope for disputes, and ensure the Will gives proper effect to the testator’s intentions.

[1] Stevens v McGrath and Kane [2004] QSC 138.

[2] Ibid.

[3] Nomchong v Vey-Cox [2019] NSWSC 1072.

Benjamin Kett
Solicitor