INVESTMENTS & PENSIONS
TRUSTS AND PROTECTION PRODUCTS
In the initial stages of a client ’ s financial cycle , depending on their personal and financial circumstances , they might look to protect their income and assets through life insurance , critical illness , income protection , pensions and savings . Consideration should be given to putting the life policies into trust , so the proceeds don ’ t form part of the estate on death . This would save the client a potential Inheritance Tax ( IHT ) liability and reduce estate administration for their personal representatives , as it would not be part of the probate process . However , this will need to be weighed against the type of trust you use , any potential taxation or reporting requirements , and the fact that most trusts are irrevocable .
TRUSTS AND GIFTS
When it comes to making gifts to trust , there is a preferred order . Our article , ‘ The importance of order when gifting to trusts ’, has more information on this . Ideally , depending on whether the gifts are potentially exempt transfers ( PETs ) or chargeable lifetime transfers ( CLTs ), or a combination of these , a full seven years should be left before making large gifts to trust . This prevents entry charges for the relevant property trust as well as the potential of falling foul of the 14-year shadow . For more information , see our briefing note .
This is not to say that gifts to multiple trusts or using a different combination of trusts should not be considered – but you do need to be mindful of how gifts are made and their timing .
The rules of adding gifts to multiple trusts changed in December 2014 . Prior to this , discretionary pilot trusts were a genuine planning tool . Here , trusts were set up on consecutive days with minimal values of usually £ 10 to £ 50 . Then on death , via the Will , money would be equally split between these trusts so each would have its own nil rate band on the tenth anniversary to offset against the value of the trusts .
THE RYSAFFE PLANNING PRINCIPLE
This is known as the Rysaffe Planning Principle due to the famous case , Rysaffe Trustee Co ( CI ) Ltd v IRC [ 2003 ] EWCA Civ . 536 , where HMRC failed to argue that five identical settlements should be deemed as a single settlement under s . 64 Inheritance Tax Act 1984 . The Court of Appeal stated that it ’ s up to the settlor the number of trusts they deem to create , and that each settlement was a separate ‘ disposition ’ within s . 43 Inheritance Tax Act . So , HMRC ’ s claim was rejected . However , ‘ same day additions ’ rules were introduced in 2014 , which means that planning as described above would no longer be tax efficient if the bulk of the money is added to the trusts on death . Because the money would be added to the trusts on the same day ( death of the settlor ), these would now be deemed to be related settlements , and only one nil rate band would apply across all the trusts . This could lead to entry , principal and exit charges on distributions . Rysaffe planning does still work , but it needs to be done during the lifetime of the settlor rather than adding to the trusts on death .
MAY 2024 | 21