Flexible Reversionary Trust

A flexible reversionary trust allows a person to make a gift into a discretionary trust with the aim of reducing their potential inheritance tax (IHT) liability, while still keeping the option of receiving yearly payments from the trust, if required.

The arrangement consists of a series of maturing life assurance policies which are set up at the outset to mature at future anniversary dates, so that funds can be released to the investor (settlor) each year, if required. The trustees can defer these maturity dates if the settlor doesn’t need funds from the trust at that time.

After seven years, the gift is outside the settlor’s estate, which means there’s no inheritance tax to pay on it. Any investment growth is outside of the estate from day one.

A flexible reversionary trust arrangement usually consists of a series of offshore single premium life assurance policies with varying maturity dates and a bespoke trust arrangement which gives the settlor access to the proceeds from each of the maturing policies, if required. No further investments are normally allowed after the initial one.

Such trusts are usually single settlor only, i.e. one person is making the gift into the trust, and the settlor is usually automatically a life assured on the policies; additional lives assured can also be included to ensure that the plan doesn’t automatically come to an end on the settlor’s death, thus triggering a chargeable event at what might be an inopportune time.

During the settlor’s lifetime, each time a policy reaches its maturity date, the maturity proceeds are available to the settlor, via the trustees. If the settlor doesn’t wish to receive the maturity proceeds, they can choose to defer the payment to a future anniversary date. Trust beneficiaries are entitled to any other remaining policy benefits, i.e. any policy death benefits payable, the early surrender of any of the policies that haven’t matured, or the maturity proceeds of any of the policies that mature after the settlor’s death.

The trust beneficiaries are chosen by the settlor at the outset and must be a person or people or an identifiable group but the settlor can’t be a beneficiary.

Flexible reversionary trusts are similar to Discounted Gift Trusts (DGTs) in that each involves the settlor transferring a bond or a series of endowment policies into trust and retaining the right to certain benefits. However, the DGT is less flexible as the settlor’s ‘income’ rights are defined at outset and can’t easily be changed without inheritance tax consequences whereas the flexible reversionary trust arrangement gives the settlor the option of whether to take or defer each maturity payment.

Such trusts are potentially liable to income tax and inheritance tax, but that is dependent on the situation at the time of surrender.