18 September 2012

Rysaffe Planning

NOTE: Since I posted the below (September 2012) the government have consulted on whether Rysaffe arrangements should be allowed to continue. At the time of this note (October 2013) no decision has yet been made. If you have these arrangements they could need review. Entering into them also needs to be considered more carefully. 


One of my more technical postings, dealing with a less-common piece of planning for people with larger inheritance tax problems

Discretionary trusts are a good thing once assets are inside them, for the reason that their assets are not owned by a human being and the trust cannot die, thereby never suffering the 40% “tax whammy” that inheritance tax represents. However such trusts are also a bad thing inheritance-tax-wise for several reasons:

a. There’s no exemption when you leave money to a discretionary trust (as there is, for example, when you leave money to a spouse or charity).

b. Giving money to a discretionary trust (indeed to most types of trust) in your lifetime is not a “potentially exempt transfer” like other gifts are: instead you have to pay half of the death-rate IHT right there-and-then upfront (that’s 20% of the amount you pay in, less the £325,000 “nil-band”) and you do not get this money back even if you survive for seven years. However if you do die within seven years you have to recalculate the tax and may have to stump-up some or all of the remaining 20% to make up the 40% death rate.

c. Discretionary trusts suffer “ten year charges” – inheritance tax on the value of the trust over the nil-band at rates up to 6% every ten years.

d. Discretionary trusts suffer “exit charges” – inheritance tax on the value of funds leaving the trust over the nil-band in between ten-year anniversaries, at rates up to 6%.

So, having found an acceptable way to get money into a discretionary trust, is there anything that can be done about items (c) and (d)? Yes, there is, if you plan in advance and if you consider the tax problem sufficiently serious to justify the costs. What you do is this: you establish, in your lifetime, a number of small discretionary trusts. By “small” I mean that the amount of money in them is small – usually £10 – but in all other respects they are full-blown trusts – you sign-up to trust deeds and appoint trustees who take office. The number of trusts you need is found by dividing the amount you want to settle onto discretionary trusts by the current nil band, rounding up. If you have £2million, for example, you need seven trusts. You create each of these trusts on a different day.

When you die, you make a gift of somewhere less than a nil-band to each trust, in your will. The advantage is that because each trust was established on a different day, it has its own nil-band. And, as I mentioned above, the ten year charges and exit charges are charged on assets over the nil-band. And that is likely to be nothing, or very little, if the trusts each start with less than one nil-band.