Comparison Β· 2026/27
Flexible Reversionary Trust vs Discretionary Trust
Both are relevant property trusts commonly used in Inheritance Tax planning, but a Flexible Reversionary Trust builds in a scheduled option for the settlor to receive money back, while a standard Discretionary Trust usually excludes the settlor entirely. This guide explains the difference.
At a Glance
| Feature | Flexible Reversionary Trust | Discretionary Trust |
|---|---|---|
| Structure | Segments with scheduled reversion dates | Single fund, no fixed schedule |
| Can settlor receive money back? | Yes, at each reversion date (trustee discretion) | Usually no β settlor typically excluded |
| Predictability of access | Scheduled dates known in advance | No schedule β trustee decides timing |
| Typical IHT gift type | Chargeable Lifetime Transfer | Chargeable Lifetime Transfer |
| Gift with reservation risk | Designed to avoid it via trustee discretion | High risk if settlor is a beneficiary |
| Underwriting required? | No | No |
Both structures interact with the Β£325,000 nil rate band and ten-yearly periodic charge rules for 2026/27. Take regulated advice before setting either up.
How a Flexible Reversionary Trust Works
A lump sum is split into a series of policy segments, each with a pre-set reversion date β for example annually over ten or twenty years. On each date, trustees decide whether to pay that segment's value to the original settlor, roll it forward for the trust beneficiaries, or split it between both, based on the settlor's needs at the time.
Because the settlor has no automatic right to any payment β it depends entirely on independent trustee discretion at each reversion date β a correctly constructed FRT is generally accepted as avoiding the gift with reservation of benefit rules, while still giving a realistic, scheduled route back to some or all of the capital if circumstances change.
How a Standard Discretionary Trust Works
Assets are gifted into trust for a class of beneficiaries β commonly children, grandchildren, or other family members β with trustees given wide discretion over who receives income or capital, and when. There is no automatic entitlement for any named beneficiary, which gives trustees flexibility to respond to changing family circumstances over time.
To be effective for Inheritance Tax, the settlor is normally excluded from benefiting at all β if they retain any right, even a discretionary one, to benefit from the trust, the gift with reservation of benefit rules generally mean the assets remain treated as part of the settlor's estate, defeating the purpose of the gift.