With the government freezing the IHT threshold until 2019, Canada Life's Jeremy Pearson looks at the benefits of using multiple trusts for IHT planning…
The first thing to say, and this is a very important aspect to emphasise, is the Rysaffe principle makes no difference whatsoever at the time discretionary trusts are set up.
The potential inheritance tax (IHT) saving arises at the ten-yearly anniversaries of the trusts commencing, when they are assessed for a periodic charge (known as the principle charge).
Rysaffe is actually a Channel Islands-based trust company. It had two clients, both by the name of Utley, who were the principal shareholders in their own private company and used the services of Rysaffe Trustee Company (CI) Ltd.
Remembering… the Rysaffe principle
They set up a series of five identical, but unrelated, trusts which were settled on consecutive days.
When it came to the first ten-yearly anniversary of the trusts, the Inland Revenue (as it was then known) argued there were not five separate trusts but one settlement. This would have meant that the IHT payable would be much greater.
The case eventually went to the Court of Appeal where it was decided that there were actually five separate settlements and that would be the case unless the settlor is the same in each case, and the trusts commenced on the same day.
If trusts don’t meet one or both of these requirements, they are separate settlements and the overall periodic charge should be lower.
This is best demonstrated by an example and we will assume that two clients had £200,000 to place in a discretionary trust.
Steven Single just set up one trust, but Danny Double, on the advice of his professional adviser, set up two trusts on consecutive days.
After ten years, both trust funds have doubled in value. There have been no additions to the settlement(s) and no distributions have been made by the trustees.
Let us now look at two examples of calculating the periodic charge.
So overall, Danny’s trustees have sidestepped paying IHT of £4,500. And remember that this situation – with the periodic charge being lower or eliminated altogether – will be repeated every ten years of the trusts’ existence, up to a maximum of 125 years. This will have a beneficial impact on any exit charges as well.
Jeremy Pearson is technical support manager at Canada Life
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