Pure protection plans written into a discretionary trust - Rysaffe Planning

What is Rysaffe planning?

Rysaffe planning takes its name from a court case of Rysaffe Trustee Co (CI) v Inland Revenue Commissioners (2003). In this case, two settlors each made five discretionary settlements in the same trust form and dated on five separate days and the Revenue tried to argue, unsuccessfully, that there was only one settlement.

Discretionary Trusts, periodic and exit charges

Discretionary trusts are subject to tax charges including periodic and exit charges:

• Periodic charge – every 10 years the ‘value’ of the trust, less the available nil rate band and previous chargeable lifetime transfers, will be assessed for tax at a maximum rate of 6%. 
   
• Exit charge – where the entry charge or 10-yearly periodic charge has given rise to a tax actually payable, an exit charge will be paid on any distributions made by the trustees out of the trust fund. The rate charged is dependent on the entry and 10-yearly periodic calculations but can never be greater than 6%.  

Pure protection term policies  

These are unlikely to have a value except in two circumstances:

1. Where claim proceeds are paid into the trust and remain there at a 10-year anniversary; or.  
2. Where the plan has a market value, in other words, the life assured is in ill health at a 10-year anniversary. 

Any exit charge will depend on the rate of the previous periodic charge, so is likely to be nil in most circumstances.

Whole of life plans 

For pure protection whole of life plans the value is; 

1. the greater of the open market value;  
2. the total of premiums paid at the 10-year period, 20-year period, and so on; or 
3. where claim proceeds are paid into the trust and remain there at a 10-year anniversary  

This means that for particularly large whole of life plans, a periodic charge could occur if the total of premiums paid at each 10-year anniversary exceeds the nil rate band.

How can Rysaffe planning be used to reduce or remove periodic charges

Let’s consider a whole of life policy (single life, client aged 63 attained) with a sum assured of £1.5 million and an annual premium of £36,976.04.

Before Rysaffe planning 

After Rysaffe planning

Rysaffe planning can be employed to reduce or remove periodic charges. 

• The sum assured of £1.5 million is divided into four separate policies of £375,000  
• Each policy is written into a discretionary trust on consecutive days 
• Each trust has its own nil rate band for the purposes of calculating periodic charges. As the total premiums paid in respect of each trust at 10 and 20 years are below each individual trust’s nil rate band, the periodic charge for each trust is nil. 

Exit charges 

Using Rysaffe, and having no periodic charge at the last 10 year anniversary, means that there is also no exit charge when the settlor dies and the policy proceeds are paid out. 

When should Rysaffe planning be used? 

This planning won’t be needed if the premiums are relatively small. The key is to work out if the annual premiums would exceed the nil rate band during the settlor’s lifetime by using average life expectancy.