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Case study: Inheritance tax planning using multiple trusts


The problem: A client is looking to use the Rysaffe principle for the purpose of estate planning but I have heard HMRC is introducing changes to the rules. What issues need to be taken into account?

Towards the end of April, HMRC published some guidance on the operation of the general anti-abuse rule in relation to inheritance tax planning.

The guidance contained some good news in respect of an area of IHT planning that relies on the decision in the case of Rysaffe Trustee v IRC [2003]. In this case a series of settlements were affected on different days, the idea behind which was that each trust would have its own nil rate band for IHT purposes. Therefore on the 10 year anniversary of each trust, provided that the value of each trust was within the nil rate band current at that time, there would be no 10 yearly IHT charge to pay.

As this was a case which HMRC lost and the law has not been changed subsequently, commentary in the guidance states that HMRC must be taken to have accepted the practice. The conclusion being that planning of this sort accords with established practice accepted by HMRC and, accordingly, cannot be treated as abusive for the purposes of the GAAR. However, on 31 May 2013 HMRC published a consultation document entitled Inheritance Tax: Simplifying Charges on Trusts – the next stage, which contained some proposed updates to the guidance.

One area that has been identified for simplification or possible reform is relevant property trusts and, in particular, the calculation of the 10 yearly and exit charges. These calculations can be complicated, time consuming and for smaller trusts, disproportionate compared to the tax at stake.

HMRC believes that the following changes would remove a number of the practical difficulties involved in arriving at the tax due whilst at the same time keeping the trust charges regime relatively intact. Furthermore, these changes will address concerns stakeholders have around administrative burdens and professional costs.

It is proposed that the settlor’s previous lifetime transfers should be ignored in determining the available nil-rate band for the purposes of calculating the hypothetical transfer on exit charges and 10 year anniversary charges. This will avoid the problems and associated costs of having to obtain historic records and valuations.

Non-relevant property would also be ignored for the purposes of the calculation of periodic and exit charges as this relies on establishing the initial value and obtaining historical records. The advantage of these modifications would be that trustees would only be required to know information regarding exits from the trust and other trusts in the last 10 years, rather than potentially very old information.

The nil-rate band should be split by the number of relevant property trusts which the settlor has made. This will alleviate the risk that settlors might seek to fragment ownership of property across a number of trusts to maximise the availability of reliefs or exempt amounts.

HMRC proposes that a simple rate of 6 per cent of the chargeable transfer is used in the calculation of periodic and exit charges, rather than the lengthy calculations of the effective rate and settlement rate.

HMRC recognises that it is not uncommon for professional costs to exceed the amount of tax at stake. For example, a transfer out of a trust of £10,000 after four years would have a maximum charge of £240 (£10,000 x 6% /40 x 16 quarters) but the costs associated with the computations and the preparation of the returns that need to be made under the current regime, are almost certainly going to exceed the tax payable at the maximum rate.

The proposal to divide the nil-rate band by the number of trusts in existence would mean that it would no longer be advantageous for a settlor to create multiple trusts. Furthermore, it is intended that the new simplified rules would apply to all existing trusts from a given date and to any new trusts set up thereafter.

Obviously, this is just a proposal in a consultation document and there is no guarantee that the proposal will actually be implemented. However, it is known that HMRC is very keen to see progress in this area so it does seem likely that it will happen.

It goes to show that despite the earlier good news in the HMRC guidance that the GAAR would not apply to planning using the Rysaffe principle, it is always possible for the government to introduce new primary legislation rather than simply relying on the GAAR. The proposal to catch existing planning of this sort, set up based on the decision in Rysaffe, is also regrettable and is further evidence that advice given at any moment in time may be superseded by subsequent events.

Brian Murphy is financial planning manager Axa Wealth



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