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HMRC Consultation – IHT and Trusts

26th July, 2013

HMRC Consultation – IHT and Trusts

HMRC has issued a consultation for comment by the 23 August 2013 on simplifying how trusts are charged to Inheritance Tax (IHT). If these changes are implemented you will need to review your IHT planning and any existing Trust or Will arrangements to ensure any tax savings still apply.

One of the proposals is to block a strategy known as ‘Rysaffe’ which allows multiple trusts to be created on different days thereby avoiding the related settlement rules. Under the current rules separate trusts executed on separate dates should be treated as unrelated transactions. This means each trust has its own IHT allowance or Nil Rate Band (NRB). The NRB for the current tax year 2013/2014 is £325,000. This allows people to create one large IHT free trust portfolio.

The Rysaffe principle does not affect the IHT position when the trusts are first established. The potential savings arise in relation to the periodic and exit charges. Relevant property trusts are assessed for IHT on each 10 year anniversary. Generally speaking, a periodic charge may arise on a ten year anniversary if the value of the trust exceeds the NRB. In assessing the value of the trust on a ten year anniversary you need to include the value of any other trusts created on the same day ‘related settlements’.

The Rysaffe principle arose from a Court of Appeal case involving a Channel Islands based trust company. In 1984 their clients set up five identical trusts but executed on different days. On the first ten year anniversary HMRC argued the trusts were in fact one settlement which would have resulted in a significantly higher IHT charge. At the first instance the tax authority won but the judgement was successfully appealed in 2003. Finding in favour of the tax payer, the Court of Appeal ruled that the trusts were separate settlements unless made by the same settlor (the person creating the trust) and also made on the same day.

HMRC now proposes to split the NRB between the total numbers of settlements created by the settlor irrespective of when the trusts are made. The proposal is one of several measures suggested by HMRC in relation to the simplification of IHT and trusts as the current tax calculations are deemed onerous and complex.

This is a significant attack on lifetime IHT planning, particularly for high net worth individuals and business owners. The Rysaffe principle is currently employed in the use of pilot trusts and by financial advisors when setting up life plans written in trust to meet tax liabilities on death. It is more important than ever to take comprehensive estate planning advice from a professional specialising in Wills Trusts and Tax. We can assist you by reviewing your IHT position and individual circumstances, explaining the options available to you and the changes you may need to make in light of the proposed changes by HMRC.

At Aaron & Partners LLP our Wills Trusts and Tax solicitors are also members of STEP (The Society of Trusts & Estates Practitioners). We can review your will and advise you in relation to IHT planning during your lifetime and on death.

For further information please contact us here.

 

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