How to use Rysaffe planning to manage your clients’ inheritance tax risk

Whole of life insurance is often used so that beneficiaries have ready cash to settle an inheritance tax bill. But putting policies into a single trust could open clients up to inheritance tax – unless you use the Rysaffe principle.

What is the Rysaffe principle?

The Rysaffe principle was established in Rysaffe Trustee Co v Inland Revenue Commissioners [2003]. It confirms that trusts created on different days are treated as separate settlements, each with their own nil rate band. Adopting Rysaffe planning when structuring trusts means you can help your clients manage their exposure to inheritance tax more effectively.

Why premiums matter

Here we’re talking about discretionary trusts, which have a nil rate band of £325,000 – the current threshold before inheritance tax charges are triggered.

Every premium paid into trust is treated as a chargeable lifetime transfer, unless exempt. If the amount exceeds £325,000, your client will pay a 20% lifetime tax charge.

And if your client dies within seven years of paying the premium, the tax may be topped up to 40%, minus the lifetime tax already paid.

This is where Rysaffe planning becomes essential. You can spread policies across trusts to balance the chargeable lifetime transfer and keep premiums under the nil rate band threshold to reduce the likelihood of charges.

Bear in mind that the sum assured is only relevant in certain scenarios. Inheritance tax liability always comes from the premiums paid in, not the benefits out.

How it works

A practical rule of thumb is to plan around the premium per trust versus the nil rate band. For example that could mean keeping the cumulative premiums under £300,000 per trust over seven years. This avoids exceeding the nil rate band and your client paying periodic charges.

You can use the Rysaffe principle to structure multiple whole of life policies into separate discretionary trusts, each created on a different day. Each trust will have its own nil rate band seven-year deadline.

Here’s an example: William wants to put a whole of life policy into trust, with his spouse, children and grandchildren as beneficiaries. Here’s how his charges differ when putting it into a single trust versus splitting policies using the Rysaffe principle:

Policy type Pure protection
Trust type Discretionary (with chargeable lifetime transfer)
Exemptions None claimed
Nil rate band £325,000
Investment growth None
Single trust		Rysaffe split
Annual premium	£50,000	Annual premium	Trust 1= £10,000 Trust 2 = £10,000 Trust 3 = £10,000 Trust 4 = £10,000 Trust 5 = £10,000
Cumulative value at seven years	£350,000	Cumulative value at seven years	Trust 1= £70,000 Trust 2 = £70,000 Trust 3 = £70,000 Trust 4 = £70,000 Trust 5 = £70,000
Chargeable lifetime transfer at seven years	£25,000 (£350,000-£325,000 rate band)	Chargeable lifetime transfer at seven years	£0
Lifetime tax	£5,000 (20% x £25,000)	Lifetime tax	£0
If William dies within seven years	£10,000 (40% x £25,000 – £5,000 lifetime tax already paid)	If William dies within seven years	£0

 

A note on exemption

If premiums are paid regularly from surplus income and don’t reduce the settlor’s standard of living, they’ll qualify for the normal expenditure out of income exemption. This means:

· Premiums are exempt from inheritance tax

· They don’t count towards the nil rate band

· There’s no need to survive seven years for the exemption to apply

It’s the most efficient way to fund whole of life premiums and avoid the chargeable lifetime transfer treatment altogether.

Most advisers will claim normal expenditure out of income exemption, which makes both approaches tax-free. If HMRC challenges the exemption, Rysaffe planning gives you a strong rebuff.

Three possible scenarios

All premiums qualify as normal expenditure	No chargeable lifetime transfer Nil rate band not used No need for Rysaffe
Exempt portion ignored	Balance is a chargeable lifetime transfer Use the Rysaffe principle to spread across trusts
All premiums are chargeable lifetime transfers	Rysaffe planning is essential

 

An essential tool for your kit

Rysaffe planning isn’t only about slicing up the sum assured. For whole of life policies, it’s the premium that opens clients up to inheritance tax liabilities. But smart structuring avoids

aggregation, keeps multiple nil rate bands in-tact and protects clients from periodic charges. It’s not just smart planning, it’s essential.