How to Use a Flexible Reversionary Trust to Avoid Inheritance Tax

This blog is all about how a Flexible Trust can be a really useful tool.

There are many different types of trusts, such as Discretionary Trusts or Immediate Post Death Interest Trusts, which all have different benefits. However, for the vast majority of people who are looking to place assets out of their estate for inheritance tax reasons, using a Flexible Reversionary Trust is one of the best methods to accomplish their inheritance tax aims.

Loan Trusts

You will find that many advisers recommend a Loan Trust which effectively takes the growth of the investment outside of the estate. The “loan” continues to stay in your estate until you die which means the capital remains in your estate for IHT purposes which is not what most people want. You can always get your Capital investment money back which gives some degree of flexibility.

Discounted Gift Trusts

Using a Discounted Gift Trust places the money outside of your estate with a discount on the amount of tax that is payable should you die within 7 years. You can also place more than £325,000 into an offshore or onshore bond held subject to this type of trust without triggering immediately a tax of 20%.  This is often referred to as a Fixed Income Plan (a mix of a bond and a trust). However, this form of trust is very inflexible as you can’t alter the terms of it. Once you put the money in, you get a fixed income stream whether you need it or not. Also, it cannot be altered at any time until the settlor dies.

Flexible Reversionary Trusts

As this is a type of Discretionary Trust, the trustees have a right to adjust how the money goes to the beneficiaries in the long term when the settlor dies.  This is a single settlor trust (only one person puts the money in) and the maximum is limited to the current Nil Rate Band (NRB) of £325,000 per person ( otherwise 20% tax would be payable on any excess over the NRB) If you were to put the amount of money in the trust and do nothing with it, after seven years then the whole amount of money would be outside of the estate. Every single year, you would get an entitlement to reversion of capital + growth (1/7) back to the settlor. For example, if you were to put £210,000 into a trust, you would be entitled to receive £30,000 + growth back each year. The flexibility comes from the fact that you can decide to accept the reversion or not. Moreover, if you needed a larger amount of money, it would also be possible to stack one reversion on top of another. For example, in one year, you could take out £60,000.

When the money reverts back, it has two elements: the original capital and the growth. The original capital is tax free whereas the growth is subject to income tax at your highest marginal rate. For most people, this form of trust is better than a Loan Trust as all of the money is out of the estate after seven years. It is also better than a Discounted Gift Trust because you don’t have a fixed level of income.

Benefits

1. A Flexible Reversionary Trust is highly flexible.
2. The return of the capital from a Flexible Trust would be 14.28% compared to 5% for other trusts. Essentially this means you can withdraw a bigger lump sum out should you need it.
3. Being able to get all your money back over a period of 7 years means that you can hold less assets as you can get your money back quickly. This help reduce your estate for inheritance tax.
4. If you are in a couple, you can each have a Flexible Trust. If one person in the couple were to die, then (as they are single settlor trusts) the spouse would be the beneficiary of the trust. and would be entitled to all the assets not just 1/7 as required.
5. You can have your cake and eat it because the trust is flexible as well as the money being completely outside of your estate. The only drawback is that you can’t have all your money back within one year.
6. This form of trust suits almost everyone.

Like all matters related to Estate Planning and inheritance tax, experienced advice is essential.

Call us if you require any help and speak to our inheritance tax expert now.