As I indicated in my article of last week on discounted gift trusts, the new GAAR guidance notes were published recently.
In the examples on inheritance tax, as well as the helpful confirmation that the GAAR will not be used to attack DGTs, was confirmation that well-known IHT mitigation strategies based on the “Rysaffe” principle incorporating “pilot trusts” will not be attacked under the GAAR.
The following is the appropriate extract from the guidance;
“In relation to so called “pilot trusts” it’s important to have an understanding of the fundamental IHT rules on settled property. HMRC, in the GAAR guidance, reminds us that ‘Settled property may be chargeable to IHT under the relevant property regime. A charge to tax will arise on the value of the settled property on every tenth anniversary of the settlement and a pro-rata charge will arise whenever property comprised in a settlement ceases to be relevant property. In determining the rate at which tax is charged on settled property, the value of all the property in settlements established by the same settlor on the same day – ‘related settlements’ – is taken into account.”
To take an example from the GAAR guidance notes: ‘C wishes to leave his estate in trust for his seven grandchildren. He wants to ensure that these settlements are not subject to IHT after his death. C establishes one settlement per day over a period of seven days, settling £100 on each. He revises his will so that he leaves a specific legacy of £250,000 free of tax to each settlement. Following his death, his executors pay the legacies to each of the trustees.’
The taxpayer’s aim in executing this planning is that ‘on C’s death, his estate will be subject to IHT and the tax will be borne by the residuary estate. But going forward, each settlement will benefit from its own nil-rate band and the funds added to each of the other settlements will not be taken into account in arriving at the rate of tax as the settlements are not related settlements. Provided that the value of the settled property remains below the IHT nil-rate band, the trusts will not pay any tax.’
In its guidance HMRC makes it clear that in seeing whether the GAAR should be applied the following questions (in bold) will need to be asked.
Are the substantive results of the arrangements consistent with any principles on which the relevant tax provisions are based (whether express or implied) and the policy objectives of those provisions?
‘The relevant property regime was introduced in 1982, imposing two charges on property held in settlements. The primary charge is a charge to tax on the value of the property in the settlement once every 10 years, with a pro-rata charge on assets ceasing to be relevant property – usually when assets leave a settlement – in the interim. Settlements that are established on the same day are related settlements and the value of property, immediately after they commenced, in related settlements is taken into account in determining the rate of tax that is charged on each settlement.
Because the settlements were created on consecutive days, they are not related settlements and so the rate of tax is calculated without reference to the other settlements, notwithstanding that the substantial addition of funds came about as a result of a single event – C’s death.’
Do the means of achieving the substantive tax results involve one or more contrived or abnormal steps?
‘Had C’s will established a single settlement for the benefit of all of his grandchildren that trust would have been subject to IHT. And if seven separate settlements had been established by his will, they would have been related settlements so each would have been taken into account with the other (sic) to establish the rate of tax. Establishing the ‘pilot’ trusts on separate days before death had no purpose other than to put the trusts in a tax-advantaged position.’
Do the tax arrangements accord with established practice and has HMRC indicated its acceptance of that practice?
‘The practice was litigated in the case of Rysaffe Trustee v IRC  STC 536. HMRC lost the case and having chosen not to change the legislation, must be taken to have accepted the practice.’
HMRC has clarified in the guidance that the arrangements described accord with established practice accepted by HMRC and are accordingly not regarded as abusive.
This was the outcome expected by the financial services sector but it is nevertheless reassuring to see a specific reference in the guidance notes. Rysaffe-based planning in connection with trusts of protection planning, pension death benefits and investment bonds (especially loan trusts) can, thankfully, continue unaffected by the GAAR.
Tony Wickenden is joint managing director of Technical Connection
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