A Flexible Reversionary Trust lets you gift money into a trust while keeping the option to receive scheduled withdrawals. It’s a popular estate planning tool for those who want to reduce inheritance tax without cutting themselves off from the money completely.
What you will learn
- How Flexible Reversionary Trusts reduce inheritance tax exposure over time
- Why they appeal to people who want control and flexibility
- How scheduled maturities work in an investment bond
- What happens if you take, or don’t take, withdrawals
- Whether this type of trust could suit your own financial goals
TL;DR: Quick summary
A Flexible Reversionary Trust helps reduce inheritance tax without giving up full control. You place money into a trust but retain the option to take withdrawals later. If unused, the funds stay in trust, pass down to your chosen beneficiaries, and may fall outside your estate after seven years.
What is a Flexible Reversionary Trust?
This type of trust is commonly used by individuals with larger estates who want to plan ahead for inheritance tax, but who aren’t comfortable losing access to their assets i.e. making an irreversible gift.
The trust structure allows capital to pass down to your chosen beneficiaries in a controlled and tax-efficient way, while offering you flexibility if your needs change.
How do they work?
- You invest a lump sum, often into an investment bond
- The bond is divided into yearly segments with fixed maturity dates
- At each maturity, the proceeds can either be paid to you or retained by the trust
- The trustees manage the bond and act according to the plan you’ve agreed
- Over time, the capital can fall outside your estate for inheritance tax purposes
It’s called “reversionary” because at regular intervals, a portion of the trust matures and could revert to you, unless you choose not to take it. You retain the option, but not the obligation, to access the funds.
Why people use Flexible Reversionary Trusts
This type of trust is often considered part of an effective inheritance tax reduction strategy, and is a solid option to protect your assets now without losing access to your money forever.
Furthermore, they’re particularly useful if you’re trying to plan with imperfect knowledge about your future health or financial needs.
Common reasons people use them for inheritance tax planning
Keen to learn more about this type of IHT mitigation strategy? Here are a handful of examples of why they are considered a solid wealth preservation tool:
- Reduce the size of your estate for inheritance tax
- Protect beneficiaries from receiving large sums all at once
- Keep control over when and how money is distributed
- Retain access in case your own circumstances change
- Structure your giving over time rather than all at once
All in all, these types of trusts are a way to pass on wealth without creating risk, either for yourself or the people you care about. For a closer look at how they’re used in real-world estate plans, see our article on Using Flexible Reversionary Trusts for inheritance tax planning.
How the taxation works within these types of trusts
Inheritance tax planning is usually the main reason people consider this structure. The tax benefits arise because:
- The initial gift starts the seven-year clock for IHT purposes
- Any growth in the bond is outside of your estate from the outset
- If you don’t take the maturity payments, they remain within the trust
- After seven years, the full gift may be outside your estate entirely
You’re not receiving taxable income unless you opt to take the maturities.
If you do take withdrawals, they’re usually treated as chargeable gains from the bond, not income, and may be taxable depending on your wider tax position.
This is why many people combine the trust with an offshore bond or an onshore bond, depending on their tax planning strategy.
Control, flexibility, and family protection
It’s one thing to want to reduce taxes. It’s another to protect your family from misusing the money.
With a Flexible Reversionary Trust, you set the rules. You appoint trustees, decide the structure, and control the schedule.
If you never take the maturity payments, the money stays in the trust, potentially passing down across generations in a controlled way.
A Flexible Reversionary Trust can
- Prevent overspending or mismanagement by beneficiaries
- Spread financial support over a longer period
- Ring-fence capital from relationship breakdowns or divorce
- Create a long-term family fund for future generations
For families with complex dynamics, this can be as valuable as the tax saving itself.
Is a Flexible Reversionary Trust right for you?
This isn’t an off-the-shelf solution.
In many cases, It works best when you:
- Are in good health and want to start IHT planning early
- Have surplus capital that you’re unlikely to need
- Want to reduce your estate’s value without giving everything away
- Value control and long-term planning over simplicity
- Are working with a financial adviser who can help manage the trust
You don’t need to be extremely wealthy to benefit, however, but it helps if you’re organised and thinking ahead. The earlier the trust is set up, the sooner the IHT clock starts ticking.
Practical steps and ongoing management
Setting up a Flexible Reversionary Trust usually involves:
- Choosing the trust provider and investment bond
- Defining the maturity schedule (e.g. 10-year structure, 10% per year)
- Appointing trustees and naming beneficiaries
- Registering the trust with HMRC if required
- Regular reviews with your adviser to monitor the bond performance and tax position
This isn’t something you set and forget. It’s a structure that needs maintenance, especially when maturities come up. Trustees should be comfortable with their role and understand the legal and tax implications.
Working with an experienced adviser ensures that the trust continues to serve its intended purpose, passing wealth down tax-efficiently, while keeping your options open along the way.
Flexible Reversionary Trusts: Pros & Cons
Flexible Reversionary Trusts strike a balance between control and estate planning. But like all trust structures, they come with trade-offs. Here’s a quick look at the benefits and limitations to help you weigh things up:
Pros
- Helps reduce inheritance tax over time, especially if withdrawals are not taken
- Offers optional access to capital at fixed maturity dates
- Can prevent large lump sums from going directly to beneficiaries
- Suitable for staged wealth transfer and long-term family planning
- Growth within the trust is usually outside your estate from day one
Cons
- Once set up, the structure can’t be changed or reversed
- Trustees need to be clear on their duties and manage the trust properly
- May require annual reviews and hands-on management at each maturity
- Withdrawals can trigger tax, depending on the bond and your circumstances
- More complex than simpler alternatives like outright gifting
Flexible Reversionary Trusts aren’t a one-size-fits-all solution, but they offer a useful middle ground for those who want flexibility, control, and long-term tax benefits.
Comparing other trust structures
Flexible Reversionary Trusts offer a balance of access and control, but they’re just one option. If you’re still considering the alternatives, our guide to the types of trust for inheritance tax planning covers the pros and cons of DGTs, Loan Trusts, and other structures.
FAQs
When you invest money into the trust, the seven-year rule starts. If you survive seven years without taking the maturity payments, that capital is usually excluded from your estate. Growth on the bond is also outside your estate from day one. Over time, this can reduce your IHT liability significantly.
Yes, but only on the maturity dates you’ve agreed when setting up the trust. You can choose to take the money, let it stay in the trust, or allow the trustees to decide. You can’t dip into it on demand between maturities, which is what gives the trust its IHT benefits.
Most Flexible Reversionary Trusts use investment bonds, either onshore or offshore. These are long-term products with potential for capital growth. They’re chosen for their tax efficiency and flexibility when used within a trust structure. Your adviser will recommend the most suitable type based on your goals and tax position.
If you pass away within seven years of setting up the trust, the value of the original gift may still be counted in your estate for inheritance tax purposes. However, taper relief may apply after year three. Growth on the investment remains outside your estate either way.
Yes. If you haven’t taken the maturity payments, or if only part has been withdrawn, the remaining capital stays in trust and can be distributed according to your original wishes. This allows your beneficiaries to benefit without the money passing through your estate or being taxed as part of it.