How the Flexible Reversionary Trust Can Help Reduce Inheritance Tax While Offering Control and Access
Inheritance tax (IHT) remains a pressing concern for many individuals and families, especially those with significant assets. Finding a strategy that can effectively reduce IHT, while still providing control and access to funds, is essential. One such strategy is the Flexible Reversionary Trust, a versatile trust that can serve multiple financial planning purposes.
In this post, we’ll explore how the flexible reversionary trust works, how it can help reduce inheritance tax, and why it might be an appealing option for those looking to balance tax efficiency with flexibility.
What Is a Flexible Reversionary Trust?
A Flexible Reversionary Trust is a type of discretionary trust. It allows the settlor (the person creating the trust) to transfer assets into the trust with the potential for reducing inheritance tax liability. What makes it “flexible” is that it provides a mechanism where beneficiaries can access the trust’s income and capital during the settlor's lifetime, while the ultimate control over the distribution of assets is retained by the trustees.
A key feature of a flexible reversionary trust is its ability to revert the trust assets back to the settlor if desired. This means that, if the settlor’s circumstances change, they can regain control over the assets, ensuring that the trust remains adaptable to their needs.
How Does It Reduce Inheritance Tax?
Inheritance tax is levied on estates that exceed a certain value when a person passes away. The tax is charged at 40% on the amount over the tax-free threshold, which can be significant for individuals with sizable estates.
A flexible reversionary trust can help reduce inheritance tax in several ways:
Potentially Removing Assets from Your Estate: By transferring assets into the trust, you can reduce the value of your estate, which may lower your potential inheritance tax liability. If the trust is set up in a way that complies with inheritance tax rules, the assets may fall outside of your estate for IHT purposes after a certain period.
Gifting Assets and Retaining Control: Many individuals are reluctant to make outright gifts because they are concerned about losing control over their assets. A flexible reversionary trust enables you to make gifts while retaining the ability to access the assets during your lifetime, or even reversion them back into your control if circumstances change. This flexibility is key for those who want to reduce IHT but need the peace of mind that they can adjust the arrangements if needed.
Gradual Transfer of Wealth: Since the trust can hold assets over time, you can transfer wealth incrementally, reducing the overall value of your estate gradually, potentially minimising the overall tax burden. The flexible nature allows you to adjust how much and when assets are transferred, providing control over the timing of the gifts.
Maintaining Control and Access
While the primary advantage of the flexible reversionary trust lies in its potential to reduce inheritance tax, it also offers a significant degree of flexibility and control during the settlor’s lifetime:
Access to Income and Capital: The trust allows you to retain access to the income generated by the trust assets or, in certain cases, even access the capital. This means that if you need funds for an emergency or unexpected expenses, you can still have access to them, despite having moved the assets into the trust.
Control Over Distribution: While the assets are held in trust, the trustees have the discretion to distribute income or capital to beneficiaries. However, the settlor can often retain an element of control through the power to remove and replace trustees or by being a potential beneficiary themselves. This offers a balance of tax efficiency without losing total control over the assets.
Revocation or Modification: The flexible reversionary trust allows you to change its terms, or even revoke it entirely, should your needs or circumstances change. This makes it a highly adaptable solution compared to other irrevocable trusts, which can limit your ability to modify or access the assets once set up.
Key Considerations
Trustee Selection: Since the trustees hold the discretion over how assets are distributed, it’s important to choose trustees who understand your intentions and financial goals. You may include yourself as a trustee, so you retain control of the asset.
Tax Planning and Advice: Setting up a flexible reversionary trust involves careful planning, particularly with regard to inheritance tax. Seeking professional advice from tax experts or financial planners is crucial to ensure that the trust is structured in the most tax-efficient manner possible.
Timing: To benefit from the inheritance tax advantages, the trust needs to be set up well in advance of your passing. The sooner you transfer assets into the trust, the more likely they are to fall outside of your estate for IHT purposes.
Conclusion
The Flexible Reversionary Trust offers an ideal solution for those looking to reduce inheritance tax while maintaining control and access to their assets. By providing flexibility, control, and potential tax reliefs, this trust can be an essential tool for effective estate planning. However, as with any complex financial structure, it’s important to work with a trusted financial advisor to ensure that it is set up correctly and in accordance with your personal goals.
If you're considering using a flexible reversionary trust to reduce your inheritance tax exposure, take the time to seek expert advice and ensure that it aligns with your long-term financial strategy.
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Inheritance tax planning and estate planning is not regulated by the Financial Conduct Authority (FCA).
