Flexible Reversionary Trusts Explained

How a flexible reversionary trust works

You place a lump sum into a trust, typically invested in a series of single premium investment bonds or policy segments. Each of those segments carries a maturity date, spread across future years. On each maturity date, the value of that segment reverts to you — the settlor — unless the trustees decide otherwise before the date arrives.

If you do not need the money, the trustees can defer the maturity so the segment stays in trust for the beneficiaries. If you do need it, the segment matures and the proceeds come back to you. The result is a structure where capital is progressively removed from your estate, but a scheduled route back exists for as long as you might need it.

The inheritance tax treatment

The gift into trust is a chargeable lifetime transfer. Anything above your available nil-rate band can attract an immediate entry charge, so the amount settled is usually planned around the allowance and any previous transfers in the preceding seven years. Once seven years have passed, the transfer drops out of the cumulative total and further planning can be undertaken.

Because you retain a right to the reverting segments, that retained interest is generally treated as remaining in your estate — but the balance held for the beneficiaries is outside it. Over time, as segments are deferred and the retained rights reduce, more of the fund sits outside your estate. Trusts of this kind also fall within the relevant property regime, with periodic and exit charges to consider.

Why people use them

The appeal is straightforward: control and reassurance. Clients who will not make outright gifts because of uncertainty over care costs, health or longevity are often willing to use a structure that keeps a route back open. Key attractions include:

• Capital can leave your estate without a permanent, irreversible gift
• Scheduled access if income or capital needs change
• Trustees choose who benefits and when, within your class of beneficiaries
• Assets pass outside probate, so beneficiaries are not delayed
• Investment growth accrues outside the estate from the outset
• A letter of wishes guides trustees without binding them

The risks and drawbacks

These are long-term arrangements. Early access outside the scheduled maturity dates is limited, and unwinding a trust prematurely can be expensive and tax inefficient. Investment performance is not guaranteed, and the underlying bonds carry charges that must be justified by the planning benefit. Where the sums involved are modest, simpler options such as annual exempt gifting will often serve better.

There is also complexity. Periodic and exit charges, income tax on bond gains, trustee duties, reporting requirements and the interaction with your wider estate all need to be understood and monitored. Anyone considering one of these trusts should be comfortable that they will still make sense in fifteen years, not just today.

Who they suit

Typically, they suit people in later middle age or retirement with a clear inheritance tax exposure, investable capital they do not currently need but might, and a strong reluctance to make outright gifts. They work best as one component of a plan rather than the whole answer, sitting alongside exempt gifting, pension planning, life cover in trust and a well-drafted will.

They are less suitable where all your wealth is tied up in property, where you may need substantial capital at short notice, or where your estate is unlikely to face significant inheritance tax once allowances are applied. In those cases, a simpler and cheaper route usually produces a better net result.

Taking it further

Trust-based planning is regulated, technical and difficult to reverse. It should only be entered into after a full review of your assets, income needs, health, family circumstances and existing arrangements, and with a clear projection of what the trust is expected to save compared with the alternatives.

Our advisers model flexible reversionary trusts alongside every other option available to you, including doing nothing, so you can see the real difference each route makes to your family. If the numbers do not justify the complexity, we will tell you.

Frequently Asked Questions