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Case study: Go forth and multiply

Where a life insurance policy is set up in trust to offset IHT liability, multiple trusts can be a good option

 The problem: A client is looking at using a life insurance policy set up in trust to offset an inheritance tax liability. What are the advantages of multiple trusts?

The solution: The Rysaffe principle relates to Rysaffe Trustee Co v IRC (2003). This refers to a series of smaller trusts created on different days rather than one large trust, the plan being to reduce the impact of the 10-yearly periodic IHT charges because each smaller trust benefits from a separate nil rate band.

To show how this works we will use two identical clients. Each has a potential IHT liability of £1m and their estates consist mainly of property they do not want their families to have to sell. They each require a whole of life policy with a sum assured of £1m.

Both clients have sufficient surplus income to cover the annual premiums, therefore under discretionary trusts, the premiums will be exempt rather than chargeable lifetime transfers. Neither client has made any other CLTs in the previous seven years.

Mr Singleton commences one policy under a discretionary trust with a sum assured of £1m. Mr McMultiple takes out four separate policies each with a sum assured of £250,000. He places each policy into a separate discretionary trust created on different days.

There is no IHT entry charge due to the premiums being exempt.

On the tenth anniversary, a charge could be payable depending on the value of the trusts at that time. The valuation is based on the greater of the premiums paid and the market value of the policies. Let’s assume the NRB in 2023/24 has increased to £360,000.

This example assumes the annual premium is £20,000 for one policy and £5,000 each for the four policies. A charge may be payable on subsequent ten-yearly anniversaries as the total premiums paid could eventually exceed the current nil rate band – this will occur quicker for Mr Singleton.

But what if the clients were in really poor health at the 10-yearly anniversary? The market value of the policy would be used instead if it exceeded the premiums paid.

The market value is a hypothetical value based on the amount someone may be prepared to pay for the policy based on the fact that, when the life assured dies, they would receive the sum assured.

For example, if the client had a life expectancy of just 12 months on the tenth anniversary, a buyer may pay £800,000 now to receive the full £1m sum assured in 12 months’ time. 

In this case, with Mr McMultiple creating his four trusts on different days, each trust has its own nil rate band.

In calculating the periodic charge, you must include the value of any chargeable lifetime transfers made within the seven years from inception.

For example, trust four might have had to include the first premium paid for trusts one, two and three. Or these premiums might be exempt, with nothing to add into the ten-yearly calculations for trusts two, three or four.

To summarise, effecting multiple trusts can offer benefits where the trusts are expected to be managed for more than 10 years, but this planning may not be suitable for all clients. Any potential tax savings at the 10-yearly anniversaries should be weighed against any additional costs for multiple premiums or multiple trusts.

Cathy Russell is tax and estate planning consultant at Canada Life

10 year periodic charge on premiums paid
  Mr Singleton Mr McMultiple
  (One trust) (Four trusts)
    So each policy / trust
Yearly premium £20,000 £5,000
Total premiums paid to date £200,000 £50,000
Less NRB 2023/24 £360,000 £360,000
Taxable amount £0 £0
Periodic charge £0 £0


Charges on market value of policies at 10 year anniversary
  Mr Singleton Mr McMultiple
    (Four policies)
    Each policy / trust
Market value £800,000 £200,000
Less NRB 2023/24 £360,000 £360,000
Taxable amount £440,000 £0 £440,000 £0
Hypothetical tax at 20%          £88,000 £0 £88,000 £0
Effective rate = £88,000/£800,000 11%    
X 30% 3.3%    
Periodic charge for Mr Singleton 3.3% x £800,000 = £26,400    
No periodic charge would apply to Mr McMultiple    

Cathy Russell is tax and estate planning consultant at Canada Life



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