Rysaffe principles

  • Author : Ralph McGuicken
  • Date : May 2010
ABOUT THE AUTHOR: Ralph McGuicken TEP is a Senior Consultant with GFP Wealth Management

D espite the wide range of planning that can be carried out to avoid inheritance tax, there is little that we can do to avoid the grim reaper. It is staggering therefore that almost two thirds of adults in the UK don’t have a will. It is also staggering that many take little if any advice to either beat or meet the liability to inheritance tax that was notoriously described by the late Roy Jenkins as ‘broadly voluntary.’

Sometimes, however, it is difficult to plan for a sudden change in circumstances for those who find themselves in a predicament where their premature death will cause a significant tax charge. A simple example of this is where a business owner finds themselves the recipient of cash following the sale of the business. BPR has gone and this could leave their beneficiaries with a big tax bill. Equally if a windfall comes their way they may find that the value of the estate creates a similar problem.

Most professional advisors prefer life time planning to mitigate against the effects of inheritance tax and that should always be the cornerstone of any planning – beating the tax is always better than having to pay up. Where there is a sudden increase in the taxable estate, or if a client has taken little or no advice, there may be a need to use life cover to meet the liability.

The problem with these extreme situations is that once the individual’s wealth has increased significantly they have often failed to plan and cannot avoid inheritance tax. If they have sold the family business or inherited a fortune from a distant aunt this may be with little or no notice. Yet some relatively straightforward planning using life assurance can eradicate the problem – particularly in the short term, where the individual plans to make gifts to reduce the value of his or her estate.

Care must be taken with this type of planning and many financial advisors who are asked to set up policies do so without considering the full implications of their advice. Setting a plan in place to ‘meet’ the liability may create a trust fund that will be subject to the relevant property regime and as such liable to periodic and proportionate charges. This is particularly true in the case of larger sums assured as the trustees may consider holding these assets beyond the date of death. The perception that the trustees will use the proceeds to pay an inheritance tax liability ignores the fact that they will have to take into consideration the circumstances at the date of death of the settlor and their overall situation, as well as the position for the beneficiaries.

The Janet and John book of financial planning need not apply in these circumstances

Rysaffe principles dictate that where separate trusts are executed on separate dates they should be treated as unrelated transactions. This allows the advisor to design a series of policies written under separate trusts to maximise the use of this principle. It means much more work than simply setting up a single policy to ‘meet’ the tax. Yet it beggars belief how often this is ignored and I frequently come across cases where the client will be put in a position where the trust will become liable to unnecessary and avoidable tax.

Life polices come in many various forms and how these work and are treated for capital value needs to be understood. For instance a ten year term assurance has no value in year eight for a fit and healthy 35 year old. If, however, that same 35 year old had been diagnosed with cancer and now has only a few months to live the position changes significantly, as it is a certainty that the policy will pay out. This is an important aspect which must also be taken into account.

The scale of the premiums payable may be an issue for older lives or for those with health issues, as the premiums may well exceed annual allowances and care needs to be taken.

The Rysaffe principles are often overlooked by many inexperienced and poorly qualified financial advisors. Good financial advice is unfortunately a rare commodity and it is vital to ensure that the recommendations made for your clients are comprehensive. If in any doubt seek a second opinion.


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