In the pre-Budget report on December 9, 2009, the previous Labour Government published draft legislation aimed at blocking two schemes that used trusts in such a way as to mitigate the 20 per cent inheritance tax entry charges imposed under the “relevant property” rules.
At the same time, it announced it was looking at “wider solutions to the problem of trusts being used to avoid IHT charges”. In the Budget of March 24, 2010, it was announced that work would be undertaken that summer to examine how IHT could be brought within the regime for the disclosure of tax avoidance schemes. This commitment was picked up by the coalition Government with the publication of a consultation document on July 27, 2010. Following this, legislation is now in force as of April 6 this year.
The objective of the Dotas regime is to provide HM Revenue & Customs with early information about the detail of tax-avoidance schemes. It allows those schemes to be risk-assessed and, where appropriate, anti-avoidance legislation is introduced. A further objective is to identify users of such tax-avoidance schemes.
The new legislation is contained in statutory instrument 2011 No 170, tax avoidance schemes (prescribed descriptions of arrangements) regulations 2011.
Paragraph 2.2 of this states that the Dotas regime should apply to arrangements where property becomes “relevant property”, as defined in existing IHT legislation, or – more broadly – when a gift is made into a discretionary trust. Dotas also applies when a main benefit of the arrangement is that an advantage is obtained in relation to a relevant property entry charge, that is, the charge to IHT that arises on a transfer of value made by an individual during that individual’s life as a result of which property becomes “relevant”.
Clearly, the regulations will not apply to arrangements using bare or absolute trusts, as gifts to such trusts are never within the relevant property regime.
Furthermore, they will only apply to schemes where the advantage obtained relates to the entry charge, and not to the 10-yearly or exit charges which fall on the trustees.
Importantly, as stated earlier, HMRC wants to learn about schemes that are innovative, not about schemes it is already aware of. In order to restrict disclosures to new and innovative schemes, the regulations contain a grandfathering rule that exempts from disclosure arrangements if they are of the same or substantially the same description as arrangements that were first made available for implementation before April 6, or in relation to which the date of any transaction forming part of the arrangements falls before April 6, or in relation to which a promoter first made a firm approach to another person before April 6.
In addition to the regulations, HMRC has also produced guidance notes on how it will interpret the regulations. Contained within these notes is a list of grandfathered schemes. Those relating to insurance-based arrangements are broadly as follows: discounted gift schemes, loan trusts, insurance policy trusts, pilot trusts, excluded property trusts and pension scheme trusts.
It was not expected, following the publication of the original consultation document, that any of the standard IHT planning techniques using insurance policies would need to be disclosed. Nonetheless, it is good news that confirmation has been obtained with the publication of the regulations and the guidance demonstrates this is the case.
Brian Murphy is financial planning manager of Axa Wealth