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Case study: Will the GAAR target inheritance tax avoidance?


The problem

: A client has assets worth considerably more than the current inheritance tax threshold. He wants to put plans in place to offset any IHT liability but is concerned about potential changes to IHT rules. What changes are likely to IHT rules?

The solution:In June this year, the Government published its proposals for the General Anti-Abuse Rule, which followed the Aaronson report on the subject of tackling tax avoidance published in November 2011.

The Aaronson report proposed that inheritance tax should not be included within the scope of the GAAR. However, this summer’s proposal said IHT should be iincluded.

The Government does recognise that IHT operates differently to the other direct taxes and has complex interactions with the legislation around trusts and estates and the consultation invited comments on this specific area.

The consultation closed on 14 September and the intention is that the GAAR should come into effect from 6 April 2013.

It seems that opinion on including IHT in the GAAR rules has not been favourable.

There are many reasons for this. There is already an anti-avoidance rule within the IHT legislation which is set out in section 102 of the Finance Act 1986. This is the gift with reservation legislation effectively means that if a gift is made and the donor retains some benefit from that gift, the asset gifted will continue to form part of the donor’s estate.

However, clever planners began to find a way around these GWR rules and so the pre-owned assets tax was introduced.

Since 2005/6 this tax has sought to impose an income tax charge where an individual has the benefit of free, or low-cost, use of an asset which they previously owned. The intention of this tax is to counter schemes which purport to successfully avoid the GWR provisions as described above.

This meant that there were already two avoidance measures available to the government in the form of the GWR rules and the POAT legislation.

Then, from 6 April 2011, a third weapon became available as the disclosure of tax avoidance schemes rules were extended to cover IHT mitigation schemes where any entry charge that would otherwise apply when the property was transferred into trust is avoided, reduced or deferred.

The DOTAS rules include a ‘white list’ of acceptable planning strategies using life assurance products such as mainstream whole life assurance policies written in trust to mitigate IHT, loan trusts and discounted gift schemes.

It would seem at the very least that if the GAAR was to include IHT within its terms a similar white list should also continue to apply. If it does not, given that there is no definitive pre-clearance mechanism proposed in the GAAR consultation document, there is bound to be a high degree of uncertainty about the efficacy of any IHT planning action that is taken.

While there is provision made for an advisory panel it will only be able to offer opinions which will not be binding on either HMRC or the individual taxpayer.

Most people will be happy with a GAAR that aims to stop artificial and abusive tax avoidance schemes.

However, as far as IHT is concerned, there are already several methods of doing this open to HMRC by simply using the existing legislation that is currently on the statute books.

It will be interesting to see if, having read all the various responses to the consultation document, the government persist in including IHT in any new GAAR legislation.

Brian Murphy is financial planning manager at Axa Wealth 


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