We knew it was coming. July 27 saw the publi-cation of the consultation document on the extension of so-called Dotas (disclosure of tax avoidance schemes) regime to trustbased IHT avoidance arrangements. The closing date for comment is October 20. The aim is to introduce regulations on the subject later in 2010/11, to come into effect from April 2011.
The Dotas regime is contained in part seven of the Finance Act 2004 and associated regulations. For most financial planners operating in the retail financial planning market, Dotas will not mean a great deal. Most of the tax-reducing plans that they have been involved in will not have fallen within the “clutches” of the Dotas provisions.
Ordinary registered pension schemes and Isas are definitely not “discloseable “and until these new provisions, IHT has not been subject to Dotas. Ordinary individual tax planning, for example, using the chargeable-event provisions to maximise the benefits from a bond on an individual basis or ordinary portfolio management to maximise the use of an investor’s annual CGT exemptions or the use of losses would also not fall within the meaning of a discloseable “scheme”.
Most would agree that IHT is an area of taxation that has seen a proliferation of pack-aged “schemes” developed and promoted to help individuals plan for and reduce any IHT payable. Most of these have involved the use of a trust in combination with an appro-priate financial product.
These have usually been single-premium life insurance policies (bonds) but there is evidence that this “monopoly” is changing.
Most who have been around financial planning for any length of time will be aware of loan trusts, discounted gift trusts and variations on the theme. HMRC is also aware of these and, in many cases, the (usually) life offices promoting them have had some corres-pondence with it on the tax effects of the plan.
These, and the exchanges that the ABI has had on general interest IHT points, have largely been very positive towards the taxpayer. As a result, these well known retail schemes have been promoted with a high degree of confidence, which has certainly played well in the market. The result is that the mainstream plans are well known to HMRC and, with a few exceptions, the outcomes for taxpayers have been as they have been explained in the accompanying literature.
The “core” Dotas legislation referred to above is then applied to appropriate taxes (that is, the taxes to which the Dotas provisions apply) by regulation. The so-called main regime was initially applied to income tax, corporation tax and capital gains tax. It was extended to cover SDLT in 2005 and Nics in 2007. In the June Budget this year, the Government announced that it would consult with a view to extending Dotas to trust-based IHT schemes.
This followed specific legislation attacking two such schemes. At the time, HMRC confirmed that this specific anti-avoidance legislation would not apply to regular discounted gift schemes, which was welcome. The intention is that the Dotas regime would apply to arrangements where property becomes relevant property (that is, becomes subject to the IHT discretionary trust regime) and the main benefit of the arrangement is the avoidance, reduction or deferral of the entry charge.
The financial planning sector (advisers and providers) will undoubtedly be a little concerned over the potential additional burden that the proposed extension of Dotas may have on well used IHT arrangements such as loan trusts and discounted gift trusts.
Fortunately, some comfort is at hand – at consultation stage at least. A key driver behind Dotas is HMRC/Treasury concern that they are unaware of the full extent of the IHT mitigation and avoidance that is going on in connection with trust-based schemes.
In their words, there is an information gap. The objective, as is the case for the whole of Dotas, is for HMRC to be in a position to identify schemes and users at an early stage. With this in mind, the referred to “comfort” at consultation stage comes in two parts.
1: Confirmation that it is not intended to apply Dotas to transfers into trust where business property relief, agricultural property relief, conditional exemption or exemption on a transfer into a heritage maintenance fund is available to remove or reduce the charge to tax.
2: Greater comfort comes from HMRC reassurance that they want to learn about schemes that are “new and innovative”, not schemes of which they are already aware.
To restrict disclosures to “new and innovative” schemes, the draft amending regulations contain a “grand-fathering” rule that would exempt from disclosure “any scheme of the same or substantially the same, description as the scheme that was first available for implementation before a given date yet to be determined.”
The apparent lack of need to disclose “existing” schemes will cause a collective sigh of relief from providers and advisers. The interesting part for designers of new schemes will be the extent to which the description of a scheme being “substantially the same” as one HMRC knew about can be stretched.