The Rysaffe Principle reduces UK inheritance tax by creating multiple trusts on different dates. Each trust gets its own tax free allowance so you can save UK inheritance tax.

Key Points

• The Rysaffe Principle uses multiple trusts created on different days to use up nil rate bands and reduce inheritance tax.
• Timing the creation of life insurance policies within these trusts can stop their value being added to the estate and avoid periodic tax charges.
• Life assurance protection policies are designed to pay a lump sum on death to cover inheritance tax liabilities. Placing these policies in a trust is key to stopping them being in the estate.
• By using the Rysaffe Principle high net worth individuals can preserve wealth across generations and have access to their assets.

How does the Rysaffe Principle work?

The Rysaffe Principle is a powerful inheritance tax planning tool. From the case of Rysaffe Trustee Co (CI) versus Inland Revenue Commissioners this principle allows you to use multiple trusts to reduce tax on life insurance policies and other assets. Creating trusts on different dates keeps the value of life insurance policies in the nil rate band and avoids periodic charges. Lifetime gifts into these trusts are treated as chargeable lifetime transfers which have specific tax implications.

If life insurance is not in a trust its value will be in the estate and could exceed the threshold. Creating life insurance policies on different dates rather than at the same time means each policy gets its own nil rate band.

This saves UK inheritance tax and is better for the estate.

Introduction

The Rysaffe Principle allows you to create multiple trusts without them being treated as related settlements and get more tax benefits. Trusts created on different days get their own nil rate band and could reduce overall tax liability compared to trusts created at the same time. This is all about the tax implications of life insurance policies in trusts.

Placing life insurance in a trust can speed up benefits and avoid adding to the taxable estate. The Rysaffe Principle can also avoid the periodic charges that apply 10 years after the policy is in trust. Creating multiple smaller policies at different times can reduce tax liability.

What is the Rysaffe Principle

The Rysaffe Principle is a life insurance and trust strategy that can impact tax on claims. It’s particularly relevant for inheritance tax as it allows you to use up more of the nil rate bands. Creating life insurance policies on different dates rather than all at once can avoid periodic charges.

The principle comes from the case Rysaffe Trustee Co (CI) v Inland Revenue Commissioners (2003) which set out key tax strategies. Cases like this show the importance of trust planning.

If life insurance is not in a trust its value will be in the estate and could exceed the Inheritance Tax Threshold and incur tax if not managed properly.

Legal basis of the Rysaffe Principle

The Rysaffe Principle came from the case of Rysaffe Trustee Co (CI) vs. Inland Revenue Commissioners in 2003 where life insurance policies were split to avoid tax implications. The principle is from a case where multiple smaller insurance policies were used to avoid tax on a single large policy.

The ruling said that trusts created by the same settlor on different days are not related for tax purposes so you can tax optimise. In the Rysaffe case multiple smaller policies instead of one large policy avoided tax charges so this is a legal precedent for multiple trusts.

The case shows the importance of timing of the trusts as multiple policies have to be created at the right time to tax optimise.

The Rysaffe Principle components

The Rysaffe Principle allows you to use multiple trusts to tax optimise. This involves three key components: multiple trusts strategy, avoiding periodic charges and exit charges.

Each of these components is important for inheritance tax planning.

Multiple Trusts Strategy

Creating multiple trusts on different dates allows you to use up separate nil rate bands and reduce tax liability. By using the Rysaffe Principle you can spread assets across multiple trusts and not exceed the nil rate bands and reduce overall tax.

Creating trusts on different days can reduce periodic and exit charges by each trust having its own nil-rate band. Trusts created on the same day are considered related settlements which affects periodic charge calculations.

Using separate days for the creation of trusts avoids being considered related settlements and maximises tax benefits.

Avoiding Periodic Charges

The Rysaffe Principle can avoid periodic charges by splitting life insurance policies so you don’t exceed the nil rate band. Using the Rysaffe Principle can eliminate or reduce periodic charges and overall tax.

To avoid periodic charges on life insurance assets policies can be structured with staggered creation dates. Creating trusts on different dates can prevent them from being considered related settlements and therefore minimise periodic charges. Creating life insurance policies on different dates avoids the periodic charges that would apply.

Exit Charges

Using the Rysaffe Principle can save tax big time especially by avoiding periodic and exit charges on trusts. Using the Rysaffe Principle can reduce overall inheritance tax by delaying when periodic charges apply on trusts.

Creating trusts on different days can tax optimise and avoid periodic charges. This strategy can save tax big time and more of the estate will pass to the beneficiaries.

Rysaffe Principle in Life Assurance Policies

The Rysaffe Principle allows multiple life insurance policies to be kept within the nil rate band and avoid periodic charges. Life insurance policies in a trust will not add value to the deceased’s estate and therefore reduce tax.

Each type of life assurance policy will be discussed below.

Pure Protection Term Policies

Pure protection life insurance policies are designed to provide cover for a set term with no investment component. Exit charge for pure protection term policies under the Rysaffe Principle will be nil in most cases.

Using multiple life insurance policies on different days will have separate nil rate bands for each policy. Different insurers have their own trusts and rules which will affect the structuring of these policies.

Whole of Life Plans

The Rysaffe Principle applies to whole of life insurance policies where periodic charges will apply if premiums exceed the nil rate band. The nil rate band for life insurance premiums is £325,000.

If premiums for whole of life insurance exceed the nil rate band periodic tax charges will apply on the anniversary of the policy. A specified sum assured can provide the funds to pay inheritance tax (IHT) on the policyholder’s death. Using separate trusts for each policy allows each trust to use its own nil rate band and reduce IHT liability.

Terminal Illness Cover

Terminal illness cover allows the insurer to pay out the life insurance policy while the insured is still alive. When terminal illness benefit is claimed the death benefit can be received before the policyholder dies.

If terminal illness benefit is not claimed HMRC will tax the life insurance payout.

Rysaffe in Practice

In practice the Rysaffe Principle can save tax and estate planning. Below are some real life examples of how Rysaffe has been used.

Creating a Discretionary Trust

Creating a discretionary trust involves creating multiple separate trusts to use individual nil rate bands and reduce tax. This can be done by putting individual life insurance policies into trust on different days to avoid periodic charges.

Exit Charges

Exit charges for trusts will add up the total value of all related settlements created on the same day when tax is assessed at 10 year intervals. When calculating exit charges the total value of all trusts created on the same day is added together and affects the tax calculation at each 10 year anniversary.

Exit charges on discretionary trusts are assessed every 10 years on the value of the trust minus the nil rate band. Exit charges on discretionary trusts every 10 years and are calculated on the value above the nil rate band of £325,000.

Examples

Rysaffe optimises inheritance tax planning by allowing multiple trusts to be used to maximise nil rate bands. A family set up multiple trusts on different days and used each of their individual nil rate bands and saved IHT big time.

A real life example showed a high net worth individual used the Rysaffe Principle to avoid exit charges on life assurance policies by setting up accumulation and maintenance trusts under the relevant property regime.

In summary using Rysaffe can save IHT and allow families to keep wealth in the family for generations.

Rysaffe Benefits

Rysaffe can be tax efficient by allowing individuals to optimise their IHT planning. Trust planning can reduce exit charges on life insurance payouts.

More detail below.

Using Nil Rate Bands

By creating multiple trusts clients can use all the nil rate bands and reduce IHT. Rysaffe promotes spreading assets across multiple trusts to maximise the use of each nil rate band.

Each trust can be set up on a different day and they can each claim a nil rate band. Staggering the creation of trusts helps clients IHT planning and use more nil rate bands.

Total Tax Savings

Rysaffe can save tax and makes IHT planning more efficient. The exit charge is removed when the settlor dies. This only happens if there is no exit charge at 10 year anniversary.

In summary Rysaffe has many benefits for tax management in IHT. This will mean more of your estate goes to your beneficiaries not the taxman.

High Net Worth Clients

High net worth individuals benefit from Rysaffe as it gives them flexibility of access and reduction of tax charges over time. Having access to assets and reducing tax charges through trust planning allows high net worth individuals to keep control of their wealth.

Rysaffe allows high net worth individuals to structure their trusts for tax efficiency and have access to their funds. This flexibility is key to estate planning and wealth preservation.

When to Rysaffe

Rysaffe planning is key when assessing premiums, trust value and when to set up the trust.

Each of these will be covered below.

Premiums Paid

Rysaffe planning is relevant when assessing the size of the premiums in relation to the nil rate band. Especially when annual premiums will exceed the nil rate band based on the individual’s life expectancy.

You need to calculate total annual premiums to see if they exceed the nil rate band to see the tax implications. This will ensure the life insurance policies are within tax efficient limits.

Trust Value

The fair market value of the trusts needs to be assessed to see if Rysaffe planning is required. The open market value of the trust needs to be known to understand the tax position and to Rysaffe plan.

The open market value of the trusts needs to be assessed to see if Rysaffe planning can be applied. When assessing the value of a trust under Rysaffe, the greater of the total premiums paid at each 10 year anniversary, open market value or actual trust value needs to be considered.

When to Set up the Trust

Setting up trusts on different days maximises tax benefits as each trust can use the available nil rate bands. Rysaffe promotes multiple trusts which is key in IHT planning.

Timing of trust creation can save tax compared to a single trust. Each trust set up on a different day can use its own nil rate band and total tax free.

Rysaffe is designed to optimise IHT planning and multiple trusts. It allows families to look after their estates without paying unnecessary tax.

Many think that multiple trusts means more complexity without benefits. A common myth is that Rysaffe is only for high net worth individuals. Some think that setting up separate trusts will trigger higher IHT penalties which is not the case if structured correctly.

Conclusion

In summary Rysaffe is a powerful tool for IHT planning through multiple trusts. By timing the trusts and structuring the life insurance policies correctly you can save tax. This is not just for high net worth individuals but for anyone who wants to pass on their estate to future generations. By Rysaffe you will pass on more of your wealth to your loved ones, a well planned and tax efficient estate.

FAQs

What is the main benefit of Rysaffe for IHT planning?

The main benefit of Rysaffe for IHT planning is to minimise tax liability through multiple trusts and to use separate nil rate bands. This will save tax for the beneficiaries.

When does the timing of the trust creation affect tax liability?

The timing of the trust creation affects tax liability as each trust can use its own nil rate band and overall tax will be reduced. So timing of the trust creation is key to tax efficiency.

Can Rysaffe be applied to any life insurance policy?

Rysaffe can be applied to any life insurance policy but the trust structure and policy type needs to be considered as there may be tax implications. So planning is key to make it work.

Is Rysaffe only for high net worth individuals?

Rysaffe is not just for high net worth individuals, it can be used by anyone who wants to IHT plan. So the benefits can be applied to a wider audience.

What are the myths about Rysaffe?

Rysaffe is only for high net worth individuals, more complexity without benefits and will trigger higher IHT penalties. But not true if structured correctly.