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Tony Wickenden: Rysaffe principle under threat from HMRC consultation

Although Rysaffe-style IHT planning is unaffected by the GAAR new proposals from HMRC to introduce “anti-fragmentation” provision


After the good news that ‘Rysaffe’-style trust fragmentation will not be attacked under the GAAR as it represents practice accepted by HMRC, we have the less good news from the Inheritance Tax: Simplifying Charges on Trusts – The Next Stage consultation document that (among other IHT trust simplifications ) HMRC is proposing legislative action to prevent IHT tax loss, and deliver simplicity, by ‘anti-fragmentation’ provisions.

This is not yet law but it is a firm proposal made in the consultation document perhaps, surprisingly, based on responses.

The need to do this, according to HMRC, is a necessary corollary to its aim of removing (or at least diminishing) the difficulty, complexity and resulting professional costs  incurred in calculating the tax liability in relation to periodic and exit charges which can exceed the amount of tax at stake. The proposed simplifications are:

  • Ignoring the settlor’s previous lifetime transfers when determining the available nil-rate band for the purposes of calculating the hypothetical transfer on exit charges and ten-year anniversary (periodic) charges.
  • Ignoring non-relevant property for the purposes of the calculation of exit and periodic charges.

Applying a simple rate of 6 per cent to the chargeable transfer for the purposes of exit and periodic charges, rather than requiring lengthy calculations of an effective rate.

Here are some relevant extracts from the document:

From the introduction:

“Splitting the nil-rate band is integral to the proposals to simplify the calculations. Without this provision, the scope for any changes to simplify the calculations would be limited due to the risk that it would lead to greater avoidance and the adverse impact to the Exchequer. Dividing the nil-rate band equally or apportioning it between the number of trusts in existence would ensure fairness in the system and protect IHT revenues.”

From the responses section:

“Settlors are currently able to set up multiple settlements. But if they are not created on the same day they are not related settlements for IHT purposes and they each qualify for their own unrestricted NRB. In response to HMRC concerns that simplification could increase the risk of fragmentation of settlements, a third of respondents suggested that the IHT NRB could be shared between the number of trusts established by the same settlor. They added that dividing the NRB in this way could replace the burdensome requirement for historical information when calculating the IHT charges.”

HMRC’s proposals for simplifying the IHT calculations draw on this suggestion.

From the ‘simplification’ section:

”The nil-rate band should be split by the number of relevant property settlements 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.”


“Settlors currently benefit from the use of multiple settlements because if they are not created on the same day they are not related settlements for IHT purposes. The current fragmentation rule aims to prevent a settlor reducing trust charges through the use of multiple trusts each with its own unrestricted nil-rate band. But the rule can be easily side-stepped by those setting up trusts during their lifetime by simply setting up a series of trusts, each on a different day enabling the settlor to avoid IHT trust charges. A new rule which split the nil-rate band between settlements made by the same settlor would mean that the “related settlements” rule would no longer be necessary.

“Under a more simplified regime, HMRC’s proposal for the first ten year charge is that the nil-rate band is split between all relevant property settlements made by the settlor and in existence at any time between the date the trust concerned was set up and the time of the charge. This would include any settlements which had been wound up before the date of charge.”

We will need to watch developments very carefully but there seems to be a strong likelihood that legislation will ensue.

HMRC’s suggestion that new provisions splitting a single nil-rate band among all relevant property settlements made by the same settlor and in existence at any time between the date the trust commenced and the time of the charge is a little worrying. It gives no reassurance that trusts established on the Rysaffe basis before any new legislation was introduced would not be affected. Given that such multiple unrelated trusts would have been established based on clearly established law and practice ‘accepted by HMRC’ (See the GAAR guidance), it is to be hoped that there would be strong and coherent resistance to the application of any new anti-fragmentation rules to such arrangements.

This development reminds us that just because the GAAR doesn’t apply to a strategy does not mean that specific legislation, say, in the form of a TAAR, will not be drafted to achieve a required HMRC outcome.

Tony Wickenden is joint managing director at Technical Connection

Through Techlink Professional, you can access CII and IFP-accredited CPD, a full and up-to-date technical library, technical updates, business generation ideas and, through our additional ASKservice, case-related technical support. Techlink Communicator delivers content for regular client and professional adviser communication. Go to and click the Free Trial link. Go to for more details on our services or call 020 7405 1600.



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