What is a Flexible Reversionary Trust?
A Flexible Reversionary Trust is one way of reducing a potential inheritance tax liability without giving up total access to funds in the future if they are needed.
When using a Flexible Reversionary Trust, the settlor gifts money into the Trust, starting a seven-year clock on the gift, but retains access to flexible periodic payments. The initial investment is removed from the settlor’s estate after seven years for IHT purposes and investment growth achieved on the amount gifted into the Flexible Reversionary Trust is immediately outside the estate.
It is usually advisable to limit the amount gifted at any one time to £325,000 as any amount above this (£325,000 being an individual’s nil rate band) is subject to a lifetime inheritance tax charge of 20%.
The Flexible Reversionary Trust can continue after the settlor’s death meaning that further inheritance tax planning can be carried out, should this be required.
A Flexible Reversionary Trust allows the settlor to specify that a percentage of the original investment, is potentially reverted to the settlor each year on the anniversary of the establishment of the Trust.
If this money is not required, one can simply roll the policy forward to another’s year anniversary. Many see the relationship between gifting into a Trust in this manner whilst still retaining access to funds, as creating a highly flexible “halfway house” arrangement.
We have included an example from Canada Life International’s website to illustrate how this kind of Trust could work in practice:
Case study example of a Flexible Reversionary Trust
- Ross is 67 years old, divorced, and healthy. He has two children, four grandchildren, and one great-grandchild and is keen to minimise the IHT payable on his death and to make provision for his family, both during his lifetime and on his death.
- However, he is concerned about the increasing costs of care and doesn’t want to be a burden to his family if he falls ill.
- He has a property of £750,000, investments and savings of £400,000, and a pension income of £25,000 each year, which is sufficient to maintain his standard of living.
After speaking to his family and his financial adviser, Ross decides to invest £325,000 into a Flexible Reversionary Trust to provide him with an IHT-efficient investment, but also give him access to capital if needed. The maturity dates on the policies are set to mature evenly over ten years to provide flexibility.
For the first ten years, Ross is in no immediate need of any payments, so the trustees defer the maturity dates.
Unfortunately, at age 77, Ross suffers a stroke and wants care in his own home to assist in his daily living rather than move to a residential care home, while he recovers. After assessment, the value of his property means he would have to self-fund his care, but his pension income is not sufficient.
Ross asks the trustees to allow policies to mature each year to assist in funding his home care, which they agree to. That year they let the required number of policies mature to provide sufficient capital to meet these costs and they defer the remaining policies to subsequent years.
During the following year, his health improved and so the level of care he needed reduced. Therefore, the number of maturities required is also reduced.
Later that year, Ross can be fully independent again and does not need any adaptations to his home. The trustees therefore agree to defer all future maturity dates, as they arise, until his circumstances change.
Sadly, Ross passes away six years later. His investment at this time is valued at just over £524,000 thanks to the investment management provided by his financial adviser over the years. The trustees decide to distribute part of this to his adult children and grandchildren, whilst the balance remains invested by the trustees for future generations.
In summary, the Flexible Reversionary Trust:
- Provides access to flexible payments – the trustees can provide payments to Ross to help him pay for his living and/or care expenses. He is then able to stay in the comfort of his own home whilst receiving care, avoiding the need to sell his property.
- Provides the ability to assist the family – it is a discretionary trust, which means that the beneficiaries can receive distributions from the Trust at any time.
- Gives control over who benefits and when – the trustees decide on the timing, and appropriate amounts, to be paid to the beneficiaries; possibly guided by a letter of wishes that Ross had provided.
Once Ross had survived seven years from his original investment, the initial gift was outside of his estate and free of IHT – giving his estate a potential saving in IHT of over £100,000. All the growth was outside from day one too.
How can we help?
Jack Green is an Associate and Independent Financial Adviser in our expert Investment Management team, specialising in pensions and retirement planning, cash flow modelling, investment advice for individuals, Inheritance Tax planning and protection planning.
For advice on or further information concerning the subjects discussed in this article, please contact Jack or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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