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Tony Wickenden: Objective IHT test requires clarification

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Many people in the business of giving advice on inheritance tax planning, or designing or promoting arrangements aimed at reducing or providing for it, will understandably be concerned about the potential breadth of application of the proposed Dotas provisions. 

HM Revenue & Customs has initially cast the net wide. Part 2.43 of the consultation document proposes an extension of the current narrow hallmark to cover:

  • Arrangements designed to avoid or reduce an initial charge to IHT
  • Arrangements intended to reduce IHT on death.
  • Part 2.44 provides some hope, however, and securing a favourable interpretation of what it provides will be an important objective of the consultation. In mitigation of the breadth of Part 2.43, it says: 
  • It is the Government’s intention that the new hallmark should be targeted
  • It is the Government’s intention to impose a disclosure requirement only on arrangements that an informed observer would reasonably consider to be an IHT avoidance scheme or arrangement.

Two key aspects require official clarification: what is meant by “an informed observer” and what is meant by “avoidance scheme or arrangement”?  

What level of understanding of IHT planning, relevant legislation and government policy would you attribute to this “informed observer”? Well, you would reasonably expect them to know about the fundamental change in official attitude to what is acceptable and unacceptable in relation to tax avoidance. Apart from the media focus on aggressive avoidance, a growing number of reported tribunal and court cases have applied a purposive (rather than literal) interpretation in finding for HMRC in avoidance cases – in effect looking beyond the pure form of the strategy under investigation, concentrating on the substance and seeking thereby to apply the intent of the legislation.

These cases, plus other official observations, consultations, legislation and, in particular, the general anti-abuse rule and special papers related to the fight against tax avoidance, appear to make it clear the new definition of tax avoidance is that which attempts to defeat the intention of Parliament as expressed in legislation. And the test of Parliament’s intent in this context is an objective one – that is, one which the courts, from the information available, can reasonably attribute to Parliament. This is different from an approach that attempts to ascertain the subjective intent of the legislative draftsman. It will thus be essential, through the consultation, to secure clarity and certainty in relation to the scope of the proposed extended IHT hallmark. Fortunately,  the Government has a similar aspiration.

Narrow test 

The emergence of a “white list” of acceptable schemes is unlikely. The consultation document has made this clear but helpful clarity can still be secured. Ideally, we will emerge with a relatively narrow test based on a clearer understanding of what the Government has in mind. It clearly does not want to be bombarded with Dotas declarations for every arrangement that has any beneficial IHT planning outcome. 

It is also clear from the consultation document that Dotas applications will not be required for arrangements that are merely using the reliefs given in the legislation, such as business property relief. The key challenge will be to secure reassurance in relation to as wide a range of other arrangements in popular use as possible. This is important given the proposed removal of “grandfathering”.

For example, would the simple provision for IHT through life assurance in trust be the sort of avoidance the Government has in mind? We hope not. The premiums would reduce the payer’s estate but would either be exempt or would be chargeable transfers, probably within the nil-rate band. So there would be no objective or intention to reduce an initial charge to IHT.

Simple gifts

Holding the policy in trust keeps the sum assured from increasing the estate of the life assured but does it reduce the charge to IHT on death? Well, only if you take the view that without the trust the estate of the individual and the overall IHT liability would be higher. One would hope that “an informed observer” would not see this as avoidance that has to be disclosed. The same would hopefully be true of simple gifts into trust – of bonds or collectives. 

It is arguable no avoidance other than that permitted by legislation is at play in relation to a simple loan trust that is genuinely founded on a loan that is repayable on demand and interest-free. There is no avoidance of an initial charge as no gift is made and the lender’s estate is not diminished. Also, there is no avoidance of the charge on death as the outstanding loan is included in the estate of the lender. 

So what of discounted gift trusts? There is no avoidance of the initial charge as the amount that is actually given (actuarially determined) will be assessed, depending on the type of trust, as a chargeable or potentially exempt transfer. And, on death, the value of what is retained by the donor/settlor genuinely and commercially evaporates. 

These are the sorts of argument that should be put forward during consultation as examples of what does not need to be disclosed to ensure such non-aggressive planning remains outside the need for a Dotas disclosure. 

We are encouraged by the stated official commitment to further consultation. Here’s hoping.

Tony Wickenden is joint managing director at Technical Connection

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