Life interests in property and the Age Pension: how Centrelink assesses an interest you can't sell

When someone dies and leaves property to others, a will sometimes splits the rights: one person receives a life interest — the right to use, occupy, or receive income from the property for the rest of their life — while other beneficiaries, often children, receive the remainder interest, meaning they eventually inherit the property when the life interest holder dies. Life interests arise most commonly when a surviving spouse is left a life interest in the family home or an investment property rather than outright ownership.

A right of residence is a legally distinct arrangement. It gives the holder the right to occupy the property but not the right to any income it generates, such as rent. Centrelink may treat the two differently, particularly where the holder cannot monetise the interest — but the distinction and its pension implications are often not considered when the will is drawn.

Is a life interest in your home exempt from the Age Pension assets test?

If you hold a life interest in a property and actually live in it as your principal home, Centrelink treats you as a homeowner. The property is exempt from the assets test — just as it would be if you owned it outright — and you are classified as a homeowner for threshold purposes. This is generally a favourable outcome. The home stays off the assets test regardless of the fact that you don't hold full legal title.

The conditions matter. You must actually be living there as your principal home. If you vacate the property, rent it out, or it is left vacant, the position changes entirely.

How does Centrelink assess a life interest in a property you don't occupy?

If you hold a life interest in a property you do not occupy — whether it is rented to tenants or sitting vacant — the rules are different and the outcome is less favourable. The life interest has an assessable value, calculated using an actuarial method. Centrelink applies Australian Government Actuary life expectancy tables to the current market value of the property to arrive at a capitalised value for your interest. That value is included in your assets test assessment.

This surprises many people. The property cannot be sold, the title belongs to the remainder holders, and the life interest itself may not be transferable — and yet Centrelink assesses it as an asset. The position is that a life interest is a property right with real economic value, even though it isn't liquid. The assessed value diminishes over time as life expectancy shortens, and Centrelink typically revalues the interest at each review cycle.

If the property generates rental income, that income is assessed under the income test. Unlike financial assets, the income from a life interest property is not deemed — Centrelink uses the actual net rental income after deducting allowable expenses such as rates, maintenance, and property management fees. This is a practical distinction worth noting: financial assets like bank accounts and shares are always assessed through deeming regardless of actual return; rental income from a life interest property is assessed at what it actually earns.

Is the remainder interest also assessed by Centrelink?

The part that often catches families off guard is that the remainder interest — held by the children or other beneficiaries who will eventually inherit the property — is also a Centrelink asset if those beneficiaries are receiving a pension or government payment. Remainder interests are assessable to the people who hold them even while the life interest continues. The assessed value is discounted to reflect how long the life interest is expected to run, but it is not zero, and it is not ignored.

Why should Centrelink means testing be considered when drawing up a will?

Estate planning lawyers and financial advisers don't always work together, and Centrelink means testing rarely enters the conversation when a will is being drafted. If a will creates a life interest in favour of a surviving spouse who is, or may be, on the Age Pension, a Centrelink impact analysis before the will is finalised is worth doing. The structure may still be the right choice — but it's better to understand the pension implications before probate than to encounter them afterwards.

A common scenario: a husband dies and leaves his wife a life interest in an investment property — not the family home — with the children taking the remainder. The wife now has an assessable asset (the capitalised life interest value) and assessable income (the net rent). Both affect her pension. The children's remainder interests are also assessable if they receive any Centrelink payment. This outcome may be exactly what was intended — but it should be a conscious choice made with advice, not a surprise that emerges during a Centrelink review.

What do you need to report to Centrelink when you receive a life interest?

If you receive a life interest through an estate, Centrelink must be notified. You will need to report receipt of the interest as a new assessable asset, any changes in the property's market value, changes in occupancy status, and rental income received. Centrelink will assess the value and advise what impact, if any, it has on the pension.

Life interests involve intersecting areas of law — property law, estate law, income tax, and Centrelink means testing — and the interaction between them produces outcomes that are not always intuitive. Where a life interest forms part of an estate or is anticipated in a will under review, specialist advice from a financial adviser working alongside an estate planning lawyer is the appropriate starting point.