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Mini adventure

Last week I was looking at loan trusts and how, even with a nil value for the settlement on commencement (the entire value of the settled property being constituted by the funds loaned which, net of the current outstanding loan, leaves a nil value), there could be a value in excess of the nil-rate band available to the settlement at the time the first periodic charge arises.

Of course, this is only likely for the bigger cases but the risk could be increased if the lender does not take loan repayments.

The main IHT planning characteristic of a loan trust is, of course, that it represents an effective means of estate freezing and the more that is left in the trust to grow, the greater will be the trust’s value net of the outstanding loan.

So what, if anything, can be done to protect against the risk of a 10-year (and, thus, later exit) charge arising? Well, that is where the Rysaffe decision comes in. The idea would be to effect a series of loan trusts on different days to ensure that each “mini” loan trust was held on a separate trust created on a different day with, in effect, its own nil-rate band.

To ascertain whether this would be beneficial and, if so, to what extent, there is a need to compare potential tax charges with and without the employment of this “multiple unrelated settlements” strategy.

Let us look at a settlor who had not used any of his nil-rate band in the seven years preceding the creation of the trust/first trust and is effecting a loan trust for a substantial sum.

Let’s look at a case where the value of a non-bare (flexible or discretionary) trust, net of the outstanding loan, at the 10-year anniversary could be 2m.

If a single loan trust were effected and the value of the trust were 2m at the 10-year anniversary and the nil-rate band were 300,000 and assuming there had been no exits in the first 10 years, the charge would be 6 per cent of 2m – 300,000 = 102,000.

The rate for the charge on a subsequent exit before the next 10-year anniversary would be 5.1 per cent reduced by the appropriate fraction based on complete quarters elapsed since the last 10-year anniversary. If, however, the life assured had effected 10 separate policies each on different days, the position would be different. Remember, in this example, the settlor had made no previous chargeable transfers. Settled property is only “related” to other settled property if it was:

hello Created by the same settlorhello On the same dayThus, if there is the same settlor but the settlements are established on different days, the related property rules would not apply following the Rysaffe decision.

The settlor thus effects 10 separate loan trusts, each of which grows to a maximum net value of 200,000.

At the 10-year anniversary, none of the settlements would be related (based on Rysaffe). There would be no tax on settlement one as there would have been no previous chargeable transfers made by the settlor (having established loan-only structures) and the value of the trust would be 200,000. The assumed transfer would be 200,000 and the assumed transferor will have made no previous transfers in the seven years prior to the commencement of the settlement.

For settlement two, the calculation will be the same. The transferor will have made no previous chargeable transfers. The same position will be secured for all the other trusts.

No charge at 10 years will also secure a “no charge exit” for the next 10 years. So, under the current law at least, a Rysaffe strategy looks like an eminently sensible one to adopt if there is a risk of a 10-yearly charge but there is a no value or an exempt transfer at outset.

Loan trusts (with no initial transfer of value) and protection plans (with exempt premiums) seem to be obvious candidates for such a strategy.

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