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How the Rysaffe principle can bring big IHT planning benefits

Justin Naughton, 16 April 2019

Creating separate trusts with separate whole of life policies on different days can prove valuable to clients. Here’s how…

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Successive Chancellors have reviewed a number of key areas in the inheritance tax (IHT) arena over the years.

Some of the more topical areas have been non-domiciles, probate and the residence nil-rate band.

In this ever-changing world we find ourselves in, there are still opportunities to add value for clients.

The advent of the relevant property regime, where interest in possession trusts and accumulation and maintenance trusts are treated similarly to discretionary trusts, changed the way trust planning was implemented.

One area that is often overlooked for IHT planning whilst using a whole of life policy held within a discretionary trust, is the use of the Rysaffe principle. 

New day, new trust

This came to fruition in 2003 following Rysaffe Trustee Co (CI) versus Inland Revenue Commissioners.

The case related to section 42 of the Inheritance Tax Act 1984, where a series of trusts were created on consecutive days.

The Court decision, in broad terms, found that even if trusts are created by the same settlor, they will not be related settlements for IHT purposes if created on different days.

This enables your client to reduce the impact of the 10-yearly periodic and exit charge, as they will benefit from having a nil-rate band (NRB) for each individual trust.

Many associate this planning strategy for investment purposes only, as it was popular for large on/offshore life assurance bond planning.

Six years ago, in 2013, the Treasury considered disrupting this planning technique by introducing a single ‘settlement NRB’ that would be divided between all of an individual settlor’s trusts.

This idea was later dropped in favour of an anti-avoidance ’same-day added property’ rule that now specifically targets same-day additions.

However, its main focus was on asset-backed pilot and multiple trust strategies, not the use of life assurance protection plans (that aim to pay the IHT, not reduce or avoid it).

This was because payment of the premiums and the sum assured under these plans is deemed to be an increase in the value of the asset, not a same-day addition, so this planning strategy has remained a viable option.

Therefore, the Rysaffe principle can still be useful for life assurance policies - if the premiums after 10 years are likely to be greater than the NRB, then the 10-year periodic charge will apply.

Many people believe that as modern day whole of life assurance plans have no investment value, there is no value on which to make a periodic charge.

However, in practice the value for this is the greater of: 10 years of premiums, the open-market value if it was to be sold (in anticipation of death), or the actual value of the trust (if the sum assured has been paid and is still in the trust at the 10-year point).

The Rysaffe principle in action

Let's take a look at an example highlighting the benefits of the Rysaffe approach...

The client The solution
£5million sum assured Split into five policies with £1million sum assured each, in five separate trust arrangements
£45k annual premium Each policy has a premium of £9,000pa (plus policy fees)
After 10 years, the total premiums paid will be £450k. Therefore, a 6% periodic charge of £7,500 applies on the excess over the NRB (£125,000 x 6%) It would be 36 years before the current NRB is breached under each trust
Plus, should there be another 10 years of premiums, this will incur a further charge of £34,500 after 20 years There would only be a periodic charge of £2,100 (£35,000 x 6%) after 40 years, on each trust

Of course, the real benefit comes when the client/life assured dies and the sum assured is paid into the trust, for the trustees to distribute out to the beneficiaries.

If there was no periodic charge at the last 10-year point, then there is no exit charge……if not, then this could be quite considerable!

It is clear that Rysaffe is still alive and well when it comes to IHT planning utilising whole of life policies.

Justin Naughton is a whole of life specialist at Zurich

Note: The Rysaffe principle was not under review by HMRC at the time of publication, but may be in the future. All figures and tax bands used in this article were correct at the time of publication.