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Tony Wickenden: New rules on IHT tax avoidance disclosures

Tony WickendenA detailed look at the disclosure of tax avoidance scheme changes which come into force in April

As I mentioned in my last article, information is pretty important to HM Revenue & Customs. And it is not alone. Unsurprisingly, it is pretty important to most revenue-gathering authorities around the world.

The Organisation for Economic Co-operation and Development is right behind the Common Reporting Standards, for example. This means its 35 member countries agree to facilitate the exchange of financial information annually. In fact, over 100 countries are signed up to it all in all.

As such, all types of offshore income will be reported to the investor’s home tax authorities. This includes dividends, interest, annuity income and the proceeds from the sale of financial assets.

Disclosure of tax avoidance schemes

Closer to home, we have seen further expansion of the disclosure of tax avoidance schemes rules to impose a more extensive set of hallmarks in relation to inheritance tax planning. “Hallmarks” are what is required to trigger the disclosure of an arrangement to HMRC.

The Dotas regulations are an important weapon in HMRC’s fight against tax avoidance schemes it does not like.

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In essence, any person involved in the promotion of a scheme that satisfies certain conditions must disclose details of that scheme to HMRC. If they do not comply with this requirement, they risk incurring substantial penalties. Anyone that engages in the scheme needs to disclose the Dotas reference number on their tax return as well.

Revised rules

The revised IHT Dotas rules are set out in Statutory Instrument 2017 No 1172 entitled “The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017” and come into force on 1 April.

Under the revised rules, a scheme will be notifiable if it falls within the description in “Regulation 4”. An arrangement will be covered by Regulation 4 “if it would be reasonable to expect an informed observer (having studied the arrangements and having regard to all relevant circumstances) to conclude that Conditions 1 and 2 are met”.

Let’s have a look at these requirements in a little more detail.

Condition 1 is that the main purpose, or one of the main purposes, of the arrangement is to enable a person to obtain one or more of the following IHT advantages:

  • The avoidance or a reduction of an entry charge on a relevant property trust.
  • The avoidance or a reduction in specified IHT charges under certain sections of the IHT Act 1984 (mainly relating to relevant property trusts).
  • The avoidance or a reduction in an IHT charge under the gift with reservation rules (in cases where the pre-owned assets tax charge does not apply).
  • A reduction in a person’s taxable estate with no corresponding lifetime transfer.

If these were the only conditions then it may be that a material amount of IHT planning would be notifiable. However, there is also a Condition 2 to satisfy.

Condition 2 is that the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.

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It is also provided that certain arrangements are excepted from the new provisions. Most notable are if they:

  • Implement a proposal which has been implemented by related arrangements; and
  • Are substantially the same as the related arrangements.

“Related arrangements” is a term that has serious potential to be a little misleading if taken at face value. Such arrangements are defined as those that:

  • Were entered into before 1 April 2018; and
  • At the time they were entered into, accorded with established practice of which HMRC had indicated their acceptance.

Perhaps the term “accepted arrangements” might have been more appropriate.

Further clarification needed

The final rules are much broader than what was proposed in an earlier draft of these regulations. In particular, there is now no specific exclusion from the Dotas regulations for loan trusts, discounted gift trusts and reversionary interest trusts.

That said, these types of scheme have been acceptable under established HMRC practice pre-April. HMRC is aware of these arrangements and indeed, in the case of discounted gift trusts, has agreed tables of discounted values. It should clarify its precise position in the near future.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn


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