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Tony Wickenden: Complying with Dotas goes without saying

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Earlier this month I was looking at the sections of the consultation “Strengthening the Tax Avoidance Disclosure Regimes” that are specifically focused on inheritance tax avoidance. HMRC, in the consultation, is at pains to state that straightforward abuse of the existing generous IHT reliefs and exemptions would not be disclosable. It gives some useful examples of what it has in mind in sections 2.45 – 2.49 of the consultation document and these are reproduced in quotation marks below. I have italicised what I consider to be the particularly important aspects of what has been put forward.

“2.45 For example, the spouse and civil partner exemption is designed to ensure that transfers between spouses and civil partners are exempt from IHT, recognising the unique legal commitment entered into. The exemption means that, for example, on the death of the first spouse the survivor does not have to sell the family home in which they have both been living. Where an individual person uses a standard will to make use of the exemption in a straightforward way, the Government would not want sight of this ‘transaction’ under Dotas.

“2.46  Equally, arrangements which are permitted by the fundamental structure of inheritance tax would not necessarily have to be disclosed. For example, where after the death of his first wife the deceased remarried, he may wish to ensure that the assets from his first marriage pass to the children of that marriage. He can achieve this by leaving that part of his estate on revocable interest in possession trusts for his second wife, with remainders to his children. If the life interest is brought to an end whilst the second wife is still alive, she will be treated as making a potentially exempt transfer which will be an exempt transfer on her surviving seven years. The assets pass down a generation free of inheritance tax because of the structure of the tax. However, if the surviving spouse’s interest in possession was terminated after the first spouse’s death but in a way that circumvented the reservation of benefit rules so that the surviving spouse obtained continuing access to the property she shared with the deceased, such a scheme would be disclosable.

“2.47 Similarly, business property relief and agricultural property relief are designed to ensure that businesses do not have to be broken up and sold to pay IHT and to encourage entrepreneurs to invest in businesses and take the associated risks. Investing in Aim shares with the intention of qualifying for business property relief having owned them for two years and then giving them into a trust which immediately sold them would not be disclosable. This is simply the natural consequence of a relief which does not require the donee to hold the business property for any minimum period. However, doing so, but in such a way that what is effectively a double deduction is obtained by circumventing the liability provisions in Finance Act 2103, would be disclosable.

“2.48 Likewise, leaving 10 per cent or more of an estate to charity which would result in IHT being charged at the lower rate of 36 per cent on the remaining estate would not trigger any disclosure requirement. However, a gift to a charity which circumvented the anti-avoidance provisions relating to the charity exemption and did not give the full economic benefit of the gift to charity on a permanent basis would be disclosable whenever devised if first implemented after the change in the Dotas requirements.

“2.49  Arrangements would not necessarily have to be disclosed even though they may involve a mixture of exemptions, reliefs and transfers. For example, a farmer may transfer his farm to a relevant property trust and could be eligible for annual exemption and agricultural and business property relief depending on circumstances. If there was nothing more to the arrangements, an informed observer would see this as acceptable tax planning which would not need to be disclosed.

“2.50 The Government would welcome views on whether this proposed approach would achieve the aim of ensuring that the hallmark is appropriately targeted.”

Observation: The specific reference to what would not be disclosable has a similar feel to the words used to explain what the General Anti-Abuse Rule would not apply to.

Of particular interest to financial planners will be the specific reference in 2.47 to business property relief qualifying assets, for example appropriate Aim shares, as being a form of planning that would not, of itself, be disclosable.

Subject to adequately dealing with the investment risks then a BPR-qualifying investment self-evidently has some attractive IHT planning characteristics as part of an overall IHT reducing strategy.  Freedom from IHT after two years’ ownership of qualifying shares, plus the retention of control and access for the investor, will have an obvious appeal to more than a few estate planners.

Tony Wickenden is joint managing director at Technical Connection

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