The big IHT freeze: thaw it with Rysaffe

The government has announced that the inheritance tax (IHT) nil rate band will now be frozen at £325,000 until April 2019.

In the Autumn Statement, it had been announced that it was only being frozen until April 2015 and then increasing by 1% to £329,000.
This turnaround is designed to raise £1 billion more tax to pay for the government’s funding of long-term care costs.

This will mean many thousands more estates will pay IHT and could cause more trustees of existing trusts to pay IHT.

The freezing of the nil rate band means that as people get wealthier, through investments and property growing in value, more estates will be subject to IHT for the first time and other estates will suffer a higher IHT bill.

Those people who have actually done something about the IHT problem and have set up discretionary trusts will find that there is more likelihood that those trusts will be worth more than the nil rate band on a ten-yearly anniversary. This means that their trustees will have to pay 6% IHT on the excess amount.

For anyone who is concerned about a large chunk of their estate being left to the taxman rather than their family on death, trusts can still be the answer to the IHT problem. But how to alleviate the IHT problem?

The answer could be to use the ‘Rysaffe principle’. This is a strategy that follows a precedent set in a court case – Inland Revenue v Rysaffe Trustee Company (CI) Ltd [2003].

It is a very simple strategy and involves not setting up one trust, but a series of trusts on separate days. Whilst this increases the paperwork and administration, that can be more than offset by tax savings.

Overall, like previous government changes to IHT, you can still save IHT – it’s just that there is a little more work involved.

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