It is worth remembering that although the taxation of discretionary trusts is nothing new, generally the flexibility in the old regime meant that in many instances, where clients and financial advisers were planning inheritance tax (IHT) solutions, the potentially exempt transfer (PET) regime was simpler and potentially more cost-effective.

The relevant property regime that Interest in Possession (IIP) and Accumulation and Maintenance (A&M) trusts now find themselves in treats these trusts as similar to discretionary trusts for IHT purposes. The added complexities this brings does not mean IHT planning is no longer viable, it just means we need to look at the longer term view and really understand the objectives of our clients.

The flexibility that can be achieved in the new regime can make the issue of paying tax up-front (where previously there was none) a lot more palatable, as this document explains.

The 'Rysaffe principle' relates to Rysaffe Trustee Co (CI) v Inland Revenue Commissioners* (2003) where a series of trusts were created on consecutive days. The principle being that by establishing a series of smaller trusts, rather than just one trust, you can reduce the impact of the 10-yearly periodic charge and exit charge by benefiting from a nil-rate band (NRB) for each individual trust.

The Inland Revenue (now HM Revenue & Customs) contended:

‘That the making of all the settlements were associated operations and that therefore the settlor had made one composite settlement by an extended disposition.’

After an initial successful hearing both High Court and a unanimous Court of Appeal Judgement stated that Section 42 Inheritance Tax Act (IHTA) 1984 was to apply on the basis that the word 'disposition' had its ordinary meaning and was not to be extended to include a disposition by associated operations.

A key statement from the judge, Park J, dealing with the associated operations point was as follows:

‘All the parcels of shares were properly comprised in settlements for the purposes of Section 64. The associated operations provisions had nothing to do with that analysis. There were 10-yearly charges on all of the parcels of shares. It is (I assume) true that in aggregate the five 10-yearly charges would be lower than the single charge which would have applied if there had only been one settlement. But that is not a valid reason for artificially importing the associated operations provisions into the exercise and using them to impose the false hypothesis that there was only one settlement when in fact and in law there were five.’

Additionally, from a planner's point of view it is worth considering Section 62 IHTA 1984 relating to 'related settlements'. In summary for a trust to be a related settlement:

a) the settlor is the same in each case, and
b) the trusts commenced on the same day.

So, trusts created on different days do not fall within this definition.

Therefore, by creating a series of trusts on different days you may reduce the inheritance tax payable, as the example below demonstrates.

Scenario 1:

If £340,000 is made as a one-off payment into the trust and no previous chargeable lifetime transfers (CLTs) have been made in the last seven years, assuming the full NRB is available (and other exemptions have been used elsewhere) the tax liability at entry would be:

£340,000 gifted into trust
£325,000 (NRB for 2010/11)
£15,000 liable to tax at 20% (half the death IHT rate)
Initial charge = £3,000, assuming trustees pay the tax

Scenario 2:

If we now consider creating three trusts each for £113,333 on separate days.

In this example the charge is the same for the one trust route as it is for using three separate trusts. However, by setting up three trusts the 10-yearly periodic charge is likely to be lower as can be seen by the following calculations.

After ten years, if we assume that the trust fund has grown from £340,000 to £600,000 and the NRB is say £430,000 in 2020/21 and there have been no other previous CLTs other than those shown or any distributions made, then:
Assuming scenario 1 the 10-yearly periodic charge is calculated as follows:

Compare this to the three trusts used in scenario two, assuming each of the individual trust funds have grown at the same rate and are each worth £200,000.

The result in scenario two is that we have created a series of trusts where the 10-yearly periodic charges are now £0 and any future exits will also be taxed at this rate, compared to scenario one where there is tax to pay at the tenth anniversary and also on any future distributions of capital.

This planning may not be suitable for all your clients. However, when reviewing the needs of clients for immediate and future planning strategies, it can offer a clear benefit where the trust is expected to be managed for a significant period. For example, if the trust is to benefit a wide class of beneficiaries, say, grandchildren (born and unborn) to help them through their future education needs.

• HM Revenue & Customs (HMRC) can change legislation.
• You need to take care at the implementation stage to ensure the right trust is set up at the right time. 
• If a CLT is created above the current reporting thresholds, you would need to complete three sets of forms – (IHT100, IHT100a and supplementary forms depending on the assets.) 
• Growth in trust values may mean one or more of the trusts suffer 10-yearly periodic charges and consequently exit charges may apply. This is a particular risk if NRBs do not increase or increase in line with inflation or below.
• Product pricing may be adversely affected, eg smaller investments may receive lower allocation rates and premiums may be higher on protection policies due to varying mortality rates and policy fees.
• This type of planning will not suit every investor, but adds a level of planning which may well be suitable for high net worth individuals looking to create long-term IHT strategies.
• For larger initial investments, the multiple trust approach can result in more tax being payable under periodic and exit charges due the reduced impact of the nil-rate band on the subsequent trusts.