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Tony Wickenden: Dotas and IHT – what it means for advisers

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Last week I took an initial look at the consultation Strengthening the Tax Avoidance Disclosure Regimes. This covers a wide range of Disclosure of Tax Avoidance Schemes (Dotas) issues but has a substantial part dedicated to the proposed expansion of the DOTAS provisions in relation to IHT avoidance schemes.

The relevant provisions are reproduced below with what I believe to be the key aspects for financial planners italicised.

Inheritance tax

2.36 Inheritance Tax (IHT) was brought into Dotas with effect from 6 April 2011 to detect a specific type of IHT avoidance involving the use of trusts. Arrangements must be disclosed if they involve property becoming held on relevant property trusts and a main benefit is the avoidance or reduction of an IHT ‘entry charge’ when property is transferred into such trusts.

(Observation: Most accept that the “IHT hallmark” is extremely narrow and combined with ‘grandfathering’ means that relatively few disclosures are made.)

 2.37 There have been few disclosures under this hallmark. HMRC’s understanding is that this is in part because of the narrow scope of the existing hallmark and also because promoters claim that their schemes are ‘substantially the same’ as pre-April 2011 schemes and as such are outside of the current Dotas requirements.

2.38 HMRC is aware of a variety of schemes that seek to avoid IHT which would not be detected by the current hallmark because of its focus on a very specific area of IHT avoidance. These include: 

  • schemes entered into during a person’s lifetime which are designed to reduce the value of their estate, thereby avoiding IHT on death
  • arrangements which seek to avoid IHT on lifetime transfers or charges other than ‘entry charges’ on relevant property trusts

The potential tax lost as a result of such schemes and arrangements may be substantial. The Government believes these should be brought within DOTAS.

2.39 More generally, since IHT is included in other anti-avoidance initiatives such as the GAAR and the new rules on information and penalties, the Government can see no good reason why IHT avoidance schemes should be excluded from disclosure.

The proposed changes

2.41 These changes would result in the need to disclose IHT schemes sold to clients and implemented after the changes proposed in this consultation take effect.

(Observation: Perhaps the biggest shock in this proposal is that it would seem that if a scheme satisfied whatever the new hallmark is, it will be disclosable if it is promoted after the change is introduced, regardless of when it was originally devised.)

2.43 A key element of any change would be to ensure that any new disclosure requirements applicable to IHT remain tightly targeted, describe the avoidance which HMRC is interested in, and do not catch IHT planning that involves the straightforward use of reliefs and exemptions. The Government welcomes comments on how the right balance might be achieved and on the proposals described below.

The first proposal is to amend the existing hallmark so that arrangements designed to avoid or reduce an immediate charge to IHT are caught, rather than the much narrower focus on the entry charge related to transfers into relevant property trusts.

The second proposal is to introduce a requirement to disclose arrangements which, although not giving rise to an immediate charge to IHT, are intended to reduce or avoid that tax on death.

The third proposal is to extend the application of some of the general Dotas hallmarks, such as the confidentiality and premium fee hallmarks, to include IHT.

A targeted hallmark

2.44 The changes described above are those that the Government believes are needed to ensure that HMRC has a much greater flow of information about the use of avoidance arrangements in IHT.

So that the application of Dotas to IHT does not pick up what would be regarded as acceptable tax planning, it is proposed, as a further safeguard, that only arrangements which an informed observer could reasonably conclude are an IHT avoidance scheme or arrangement would be disclosable. Straightforward use of the existing generous IHT reliefs and exemptions would not be disclosable.

At worst, the proposed new hallmark would appear, in principle at least, to catch a wide range of arrangements. It is, however, encouraging that HMRC appears to be open to a discussion through consultation leading to a position where the revised hallmark is specifically targeted at the arrangements that HMRC have in mind in relation to the strengthened disclosure provisions and not all IHT planning. It makes strong representations by interested parties essential. The consultation runs until 23 October. 

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