What are flexible reversionary trusts and how could they help you and your family?

6 March 2025

You might have read our previous insights into why giving wealth away over the course of your lifetime could be a good idea.

In short, this has to do with Inheritance Tax (IHT) – reducing the value of your estate by making gifts now means your loved ones could pay less IHT after you pass away.

Your financial planner might even have spoken to you about helpful gifting options, plus the risks and potential downsides, directly.

Although “giving while living” is a great idea for many, you could be worried about giving away wealth that you suddenly need to access later on.

For instance, as we covered in our recent article on the rising cost of retirement, you could be required to fund tens of thousands of pounds’ worth of health and social care in your old age. If you have already given away a large sum to children and grandchildren, you may need to sell your home or other assets to pay for this care, which could be disruptive and stressful.

On the other hand, if you don’t need to pay for care, you could regret not giving away wealth sooner, leaving your loved ones to face a higher IHT bill than necessary.

There are several opportunities to explore if you’re in this situation, and one little-known solution could be to use a flexible reversionary trust.

Keep reading to discover what these are and how they could help you mitigate IHT while maintaining some control over your funds.

How flexible reversionary trusts work

There are several types of trust, and the reasons many people use them are to mitigate IHT and make sure their wealth is given to their chosen beneficiaries during a set time period.

For most types of trust, wealth (including insurance policies, properties, cash, and investments) is written into trust by the “settlor”, the person who provides the funds. This wealth is then managed by their appointed trustee/s until the beneficiary receives it, either as a lump sum or income. The granular details depend on the type of trust you choose and the type of wealth placed in trust.

With a flexible reversionary trust, you would normally write wealth into the trust over a seven-year period. The reason seven years is the standard time frame comes down to IHT: usually, if you make a financial gift known as a “potentially exempt transfer” (PET), your estate could still be liable where IHT is concerned if you pass away within seven years.

Once this time frame is up, the settlor has the option of retrieving a percentage payout from the trust and using the funds as they wish. Alternatively, if the settlor doesn’t need the money, it can remain within the trust for a deferred period.

Imagine you are 65 years old and are in good health. You place £325,000 – the existing IHT nil-rate band, which is the amount you can pass on tax-free when you pass away – into a flexible reversionary trust.

After seven years pass, you’re still in good health and don’t need the wealth you put in. So, you defer it for another fixed time frame, leaving it invested within the trust.

Once the funds become available again, your health has taken a turn for the worse and you have begun living in a residential care home. You draw some funds from the trust in order to cover these costs. The remaining wealth remains ringfenced within the trust for the next generation.

This is only a rough example of how flexible reversionary trusts work, and it’s very important to take advice when setting one up. Trusts are complex arrangements that require professional input. Our financial planners are here to help.

The key pros and cons of flexible reversionary trusts

Pro: IHT mitigation

Once the initial seven-year time frame has passed, any funds remaining within your flexible reversionary trust can no longer be considered a part of your estate if you die.

So, your family’s IHT bill could be much lower in future, as this portion of your wealth will have been removed from the equation.

Pro: Cost of living flexibility

Ultimately, the reason you might be looking into these trusts is cost of living flexibility.

You never know what might be round the corner, so establishing a trust for IHT purposes while maintaining some control over a portion of the funds could offer you the best of both worlds.

Con: Flexibility has a limit

Like all trust arrangements, flexible reversionary trusts have several sets of rules, regulations, and restrictions.

For instance, you likely will only be able to access a percentage of what you gift within the trust, and only over a certain time frame. So, it could be that the funds are inaccessible during the time you need them.

Con: Flexible reversionary trusts are not necessarily “tax-free”

One of the biggest misconceptions around trusts is that they’re “tax-free”. This is not true.

Firstly, if you pass away before seven years are up, the wealth within the trust could still be subject to IHT. Plus, your beneficiaries may still pay Income Tax when they draw the funds from the trust.

What’s more, there are administrative fees involved when setting up a trust, that you need to take into consideration.

Work with a financial planner to receive tailored advice for life

Flexible reversionary trusts are only one of several options available to those wanting to mitigate IHT and give wealth to the next generation.

For a full examination of your wealth circumstances, tailored advice on your options, and to gain a comprehensive understanding of the risks, it’s worth contacting an experienced financial planner.

To work with our award-winning firm, email info@depledgeswm.com or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.