Reversionary Trust

With the variety of arrangements available for inheritance tax (IHT) mitigation, there has been great debate on what to recommend to clients who are worried about IHT ravaging their estate.

Business Property Relief involves investing in investments that are high risk and can be difficult to sell, and will only be suitable for experienced investors who understand the risks.

Tax treatment varies according to individual circumstances and is subject to change

With the variety of arrangements available for inheritance tax (IHT) mitigation, there has been great debate on what to recommend to clients who are worried about IHT ravaging their estate.

In terms of packaged products, most think they broadly have a choice between a discounted gift trust – which is effective in mitigating IHT but slightly restrictive and subject to underwriting – or a gift & loan trust, which is not hugely effective for IHT planning purposes. Although the latter does allow the client access to the amount loaned.

There is another method however which we consider to be a mix of both worlds.

The RFTs are effective for IHT planning purposes and are versatile in meeting the client’s income needs.

The RFT has been designed to allow individuals to make a gift of capital whilst retaining, in a flexible and IHT efficient way, periodic access to cash if needed.

In addition, the RFT avoids the pre-owned assets tax introduced in 2004, sits outside the capital gains tax regime and defers any income tax charge on the capital invested.

TAKE CARE – We hope the investment will grow and so the settlor may be liable to some tax on maturities. On death of the last life assured (you can have up to 6), the gains will become chargeable and subject to tax.

This is achieved by combining single premium life assurance policies issued by an international life office with a sophisticated reversionary interest trust.

The discretionary settlement has an added advantage in that the actual beneficiaries do not have to be specified until the time comes, with just classes of beneficiaries (such as children and grandchildren) being listed initially.

Flexible Reversionary Trusts for IHT Planning
(in practice):

This is one of our favoured solutions as it allows full flexibility of underlying investment to suit the most cautious or the most risk favoured clients. It also provides an option to receive money back at the end of each year, which is IHT planning gold.

You will require liquid assets and a few more miles left on the clock.

The payment to such a plan is known as a Chargeable Lifetime Transfer (CLT) which means that it is likely to be exempt from IHT after 7 years of survival.

In more detail, so long as the investment is below your Nil Rate Band (when added to other CLTs from the last 7y) of £325,000 in 2017/18, you will not pay any initial tax on the gift. There may be periodic or exit charges.

TAKE CARE – As so long as you survive 7y there will be no IHT on death; however, it can affect the tax treatment of other gifts.

TAKE CARE II – It must be said, however, that Periodic and Exit charges can still apply, so planning is important. Even if the CLT does not incur an IHT charge itself, it may affect the tax treatment of further CLTs made up to 7 years after the original gift.

As you have read above, you can access large amounts of the investment each year. This is really important as access to funds is one of the most undervalued tools in IHT planning.

Should you live longer than expected or need more than is expected, you want to know that there are funds that can be utilised. Like with Business Property Relief qualifying investments, FRTs are one of very few tools that fit the bill.

The investment is split in to a chosen number of maturities which define your maximum annual draw back from the investment. The maturities occur from the end of year one and can be best defined as providing a ‘look at the money.’

When the policies mature, the proceeds are available to be drawn back out for your own use. You can draw between £0 and the full maturity each year, if required.

You can extend policy maturity dates should the money not be required, so it would instead be available in future years.

These yearly payments are optional and for best IHT planning practice should only be drawn from the plan when there are no other assets available that are still within your taxable estate or when they can be spent (or otherwise leave the estate).