Securing Your Estate: The Rysaffe Principle Explained

Inheritance Tax (IHT) poses a significant concern for individuals with substantial assets. 

Effective estate planning is essential to mitigate IHT liability, and one strategy that stands out is the Rysaffe principle. This method allows you to optimise your estate and preserve wealth for future generations. 

In this article, we explore the Rysaffe principle, its advantages, challenges and key considerations.

Table of Contents

• Key Takeaways

• What is the Rysaffe Principle?

  • How It Works

  • Example: Ms Holmes’s Estate Planning

  • Benefits of the Rysaffe Principle

  • Considerations and Challenges

• Will HMRC Challenge These Arrangements?

• Conclusion

• Next Steps

Key Takeaways

• The Rysaffe principle is a way to reduce inheritance tax by setting up multiple trusts on different days.

• Each trust can use its own £325,000 nil-rate band, lowering the total inheritance tax owed.

• Benefits include maximising the nil-rate band, avoiding asset aggregation, and customising gifts for family needs.

• Setting up multiple trusts can lead to long-term inheritance tax savings.

• Creating multiple trusts can be complex and may come with additional administrative costs.

• To receive individual tax benefits, you must establish trusts on different days.

• Professional advice is crucial to ensure compliance with UK tax rules.

• HMRC generally accepts the Rysaffe principle when applied correctly.

• The Rysaffe principle is an effective estate planning tool for preserving wealth for future generations.
  

What is the Rysaffe Principle?

The Rysaffe principle derives from the 2003 case of Rysaffe Trustee Company (CI) Ltd v Inland Revenue Commissioners. This ruling clarified the treatment of multiple trusts under inheritance tax law. 

The court established that creating several discretionary trusts on different days enables more favourable tax treatment. Each trust is considered a separate entity for IHT purposes, which can significantly enhance an individual’s tax position.

How It Works

The essence of the Rysaffe principle lies in establishing multiple discretionary trusts rather than a single trust. Under IHT regulations, the total value of all property placed in a trust within a 10-year period may be aggregated, potentially pushing the trust into a higher tax bracket.

By setting up multiple trusts on different days, you ensure HMRC treats each trust independently. This allows each to benefit from its own nil-rate band (NRB), currently £325,000 for the 2024/2025 tax year. Consequently, a substantial portion of wealth can be sheltered from IHT.

Example: Ms Holmes’s Estate Planning

Consider Ms Holmes, a successful entrepreneur with a growing business and a diverse investment portfolio. She aims to secure her wealth for her children while minimising potential inheritance tax liabilities, particularly in light of anticipated growth in her investments.

If Ms Smith were to place £500,000 worth of shares from her investment portfolio into a single trust, the entire amount would be subject to inheritance tax calculations. Assuming the current nil-rate band is £325,000, this single trust could result in a significant tax liability, as £175,000 would be taxable upon distribution after the 10-year period.

To optimise her estate planning, Ms Smith decides to implement the Rysaffe principle. Instead of establishing one trust, she creates 5 separate discretionary trusts, each set up on different days, allocating £100,000 worth of shares to each.

By doing so, each trust is treated as an independent entity for tax purposes, allowing each to benefit from its own nil-rate band. As a result, after 10 years, if the shares in each trust grow to £200,000, none of the trusts will incur any IHT upon exit, as each trust remains well within the NRB threshold.

Benefits of the Rysaffe Principle

1. Maximising the Nil-Rate Band: Distributing assets across multiple trusts enables each to utilise its own NRB, reducing or potentially eliminating IHT charges.

2. Avoiding Aggregation: By creating trusts on different days, assets are not aggregated for tax purposes, providing greater flexibility in estate planning.

3. Customised Gifting: This strategy allows for tailored distribution of assets among beneficiaries, enabling each trust to serve specific family needs.

4. Long-Term Savings: Over time, the Rysaffe principle can lead to significant reductions in periodic IHT charges for discretionary trusts.
   

Considerations and Challenges

While the Rysaffe principle offers notable advantages, several challenges should be considered:

1. Complexity of Trusts: Setting up multiple trusts increases administrative demands and may incur additional legal fees.

2. Timing is Essential: To maximise the benefits, trusts must be established on different days. Failing to do so may result in the aggregation of assets and loss of tax advantages.

3. Professional Guidance Required: This complex strategy necessitates careful planning. Consulting with a tax professional or estate planner is crucial to ensure compliance with UK tax laws.
   

Will HMRC Challenge These Arrangements?

Given the potential for significant IHT savings, concerns about HMRC scrutiny are valid. 

The General Anti-Abuse Rule (GAAR) allows HMRC to investigate arrangements primarily designed for tax avoidance.

However, the GAAR Advisory Panel reviewed the use of multiple trusts and confirmed the validity of the practice following the Rysaffe case. They noted:

“HMRC lost the case and having chosen not to amend the legislation, must be taken to have accepted the practice.”

This indicates a level of acceptance from HMRC, provided the principle is applied correctly.

Conclusion

The Rysaffe principle is an effective strategy for minimising inheritance tax liability through multiple discretionary trusts. When executed properly, it maximises the nil-rate band and helps avoid asset aggregation, leading to substantial IHT savings.

Given its complexity, it is essential to seek expert advice to ensure trusts are structured in compliance with current tax laws. With thoughtful planning, the Rysaffe principle can play a crucial role in a comprehensive estate planning strategy, ensuring that more wealth is preserved for beneficiaries.

Next Steps

If you require specialised advice on inheritance tax planning, ASWATAX is ready to assist. Our experienced team offers tailored solutions, structures and strategies, including the Rysaffe principle, to help optimise your IHT plan.

Contact us today to start enhancing your estate planning!

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.