The role of Flexible Reversionary Trusts
Many taxpayers over the last 20 – 25 years have settled some of their assets into flexible reversionary trusts for the sole purpose of mitigating Inheritance Tax (IHT) on death.
However, a more sensible approach is to focus on helping individuals to achieve the majority of their, often opposing, life and financial goals of securing their future and that of their families in the face of the many unknown future challenges they might encounter – life’s twists and turns – whilst also mitigating taxes.
These challenges may be personal, relationship, commercial, educational, health-orientated or any one or more of all sorts of unexpected future events. If such strategies can be arranged in a tax efficient manner, that then represents a real ‘win-win’ situation for the client. Gifting personal financial assets into such a reversionary trust, creates a segregated legal entity for tax purposes representing a protected store of assets, with a potential lifespan of 125 years (regardless of the lifetimes of the settlor and/or any of the Individual trust beneficiaries).
How WAY Trustees can help:
The trust is managed on your behalf, the settlor, for the benefit of all beneficiaries for so long as it is appropriate within that whole timeframe. The independent trustee will always work within an effective legal mandate specified within the trust wording and is generally guided by the ongoing wishes of the settlor.
Furthermore, the various Trustee Acts govern the way in which trustees are obliged to discharge their responsibilities.
The Tax Position:
The 2006 Finance Act introduced new rules whereby gifts and settlements placed into a discretionary trust, are taxable transfers for IHT purposes.
This means that most settlors restrict such gifts to £325,000 every seven years. This is to reflect the extent of the NRB for IHT and the inter vivos period during which such gifts continue to be aggregated with any other chargeable transfers.
Historically, the average age of our settlors tends to be around 70 years of age. To be comfortable gifting a portion of their assets, they clearly need to know they could personally still potentially benefit from the assets they have gifted, if their circumstances change. This is the job of the reversion facility.
Gifts then fall out of account after 7 years, enabling clients to recycle their full Nil-Rate Band (currently £325,000), every 7 years.
A male aged 70 typically has an average life expectancy of 16 years, whilst a female has an average life expectancy of 18 years* (thus enabling each to potentially recycle their respective NRB’s twice and still have their respective full NRB be-reinstated before death.
Quite distinct from all the other benefits of such trusts, explained in some detail in the following pages, this means that there can also be a substantial tax benefit (a potential reduction of some £130,000 in Inheritance Tax per person, every 7 years or almost £400,000 in the above examples where 3 NRB’s are utilised).**
* Source: Office of National Statistics Average Life Expectancy Tables for England & Wales published December 2019
* * Current Nil Rate Band, £325,000 X 40% IHT tax rate = £130,000
Protecting Family Assets
There are many circumstances whereby a reversionary trust and the trustees can help protect and/or utilise family assets.
The following are just some examples of life events where a suitable trust can be an emotional and practical comfort, not a hindrance, to creating financial security for the settlor and their family during their lifetime, on their death and long into the family’s future (up to 125 years).
Having access to funds to cover Family Emergencies. A son’s business needs financial assistance, a sister’s roof blows off, a favourite aunt has a medical problem requiring expensive and urgent treatment. A suitable trust that allows gifts or loans to a class of beneficiaries aside from named or added beneficiaries is crucial in circumstances such as these.
Protecting Family Wealth. Every parent wants to help their son or daughter on their way in life, such as helping with a first house purchase. The often-unvoiced fear is that good relationships can turn sour and a subsequent divorce will see half of that gift disappear out of the family forever. Offering such support via a loan from the trust avoids this consequence.
Covering Care Fees. The potential requirement to cater for and cover one’s own long-term care needs is a constant source of concern for us all as we get older. Do we retain cash in our estate to do this or is there a better solution? By moving money into a trust, it falls out of account for IHT purposes after 7 years but remains available for care home or other health/medical costs at the discretion of the trustee, who will refer to the Settlors “Letter of Wishes”.
Avoiding unintentional consequences of remarriage or a new civil partnership. It is not uncommon for a widow or widower to remarry, in many cases a younger partner who is likely to outlive them. Upon remarriage any previous Will becomes defunct and subsequent “joint” assets will automatically pass to the survivor on the first death. That often means original family assets become diverted away to new and external family. Assets within, or lent by, a trust can protect such family assets.
IHT savings and a surviving spouse or civil partner. On the other hand, a couple who have each settled funds into trust can benefit by the deceased spouse/ civil partner’s trust adding the survivor as a beneficiary. By this means the survivor can be loaned funds, instead of taking reversions from their own trust, thereby creating a debt against their own estate to reduce subsequent IHT liabilities.
Special Occasions which “crop up”. Funds within a suitable trust can be used for special occasions or specific family needs. Life has always been unpredictable and having tax-sheltered funds in a trust, available to deal with life’s uncertainties, has many advantages over keeping funds within your own table estate – they are protected from external access, including from bankruptcies and other legal threats.
These are just some typical real life situations whereby, having passed assets into a separate legal entity, your own trust, you can achieve excellent safeguarding of inter-generational family wealth for up to 125 years. Our booklet, a compendium of letters of wishes and “write your own” draft clauses for such letters, offers several more situations where your personal guidance to your trustee will help preserve and protect your family wealth inter-generationally. Click here to learn more about the WAY Trustees Letter of Wishes.