Flexible Reversionary Trust

[Petronella]

Can you please advise whether Flexible Reversionary Trusts have been affected by recent changes announced in the Chancellors most recent budget speech?

My understanding is that this type of trust is considered differently from a Discretionary trust and so not liable to a 10 year IHT charge. Is this correct? Are you able to advise on the benefits and tax liabilities of a flexible reversionary trust?

I am considering passing a recent inheritance to my adult children via deed of variation and am hoping that a Flexible Reversionary Trust would be a suitable vehicle that would be acceptable to HMRC.

Thanks

[Christian Ward]

Structures that fall within the generic title of 'Flexible Reversionary Trust' were not impacted by the pre-budget report.

FRTs fall within the relevant property regime and are thus subject to the same potential charges as discretionary trusts, including the 10 year periodic charge. The only difference is that HMRC do not treat any reversions (payments) to the settlor as being subject to exit charges or cumulated for the purposes for the 10 year charge. This treatment is disputed by some professionals but it is the current practice of HMRC and thus can create a favourable situation in some cases.

If you are able to use a deed of variation you would not utilise a flexible reversionary trust, as it you can achieve greater flexibility with a standard discretionary trust. The FRT is for those who wish to retain potential access to capital and yet achieve IHT savings, without breaching the reservation of benefit or pre-owned assets anti-avoidance legislation. The FRT is not particularly aggressive and has been accepted by HMRC since the early 1990’s, but a discretionary trust established by a deed of variation can achieve the same in an even more straightforward and completely uncontroversial manner.

[Petronella]

Thanks Christian.
The problem with using a deed of variatioon plus Standard Discretionary Trust is that the property was sold above probate valuation and put into a Disctretionary Trust for the beneficiaries so we could use our Capital Gains Allowance to absorb the Capital Gains Charge. I have been advised that if I place some of my share of the residue of the estate into a Discretionary Trust, the value of the whole estate will be taken into account for the calculation of the 10 year charge. So I am exploring other options. the FRT sounded a very good alternative, but I now need to find out if the 10 year charge will be based on the whole estate, or just on the funds within it. Are you able to advise on this please?
Petronella

[Lee Young]

I am not sure I follow the comments about CGT and the use of the allowances within a discretionary trust. Could you explain the order of exactly what has happened. Also how long ago did the deceased die?

[Petronella]

Thansk for your interest.

The deceased died in November 2008. The property was eventually sold in September 2009 at a price greater than the probate value. The executors were advised to place the property into a discretionary trust with all the beneficiaries of the will being beneficiaries of the trust, the executors being the trustees. I'm not sure of the exact timing but it enabled the trustees to make use of CGT allowance and so reduce amount of tax due on the "profit".

I believe, though I am not absolutely certain, that either because I was a named beneficiary of the "Property" Discretionary Trust", or just the fact that it was placed in such a trust, the whole of the value of the property or estate has to be taken into account to calculate the 10 year charge on any Discretionary Trust that I set up via a Dead of Variation, even if that Trust is below the nil-band rate. This has the effect of the whole amount of "my" Discretionary Trust being charged at 6% on the 10 year anniversary.

Is an FRT is a Discretionary Trust? If so, I belive HMRC will consider the whole of the deceased's estate when calculating the 10 year charge.

Thanks, Petronella

[Lee Young]

Did the terms of the WIll include a discretionary trust or direct that the property be transferred to a pre-existing trust?

[Petronella]

The Will states that a Nil Rate Band Discretionary Trust should be set up from the date of death for a period of 80 years.
Peronella

[Lee Young]

As it is a nil rate band discretionary trust this means that for at least 10 years there will be no exit charges. The earliest possible charge to IHT will be after 10 years.

Youmentiona deed of variation. If I am right in assuming that you inherited a share of the residue that you then resettled by a deed of variation into a second discretionary trust then thetwo disctretionary trust will be realted for IHT purposes and therefore on each exit or anniversary the initial value of the other will be relevant to determine the IHTpayable. This would mean that (despite what I have written in my first paragraph) there could be IHT in the first 10 years.

If my assumptions are not correct then it would probably be best to seek face to face or direct advice as the position is not entirely clear and therefore it would be unwise to rely on any conclusions drawn here.

[Petronella]

Thanks Lee you are correct. Thanks for explaining it so clearly
Petronella

[Christian Ward]

As far as your options as this stage, much will depend upon whether you want to retain potential access to the capital you envisage placing in trust.

If not then you might be better served establishing a discretionary trust yourself rather than using a deed of variation to vary your late mother's will - this will ensure the new trust has a full nil rate band for the purposes of the 10 year and exit charges. As long as your life expectancy is over seven years and you do not intend settling more than the current nil-rate band now and over the next seven years then there should be little downside.

If you do require potential access to capital then the choice is not so straightforward. Both a Flexible Reversionary Trust and discretionary trust established via a deed of variation will allow you to retain potential access to the trust capital. As stated in an earlier post the deed of variation trust will provide greater potential access, flexibility and be safer from potential HMRC attack than a FRT. The flipside is that the FRT would have a full nil rate band for the purposes of the 10 year charge calculation because it would not be related to the existing will trust. Not a straightforward choice.

A FRT and a trust established by a deed of variation will be settlor interested for income tax purposes whereas if you establish a discretionary trust then it should not be settlor interested. This may or may not be an important factor and will depend upon your situation.

Lee Young's comment on the need for advice is instructive. In many ways this situation demonstrates that advice obtained in later life could well have prevented problems after death. In this case one or more 'pilot' trusts established prior to death would have avoided the problem caused by the trusts established via the will and deed of variation being related settlements.