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Tony Wickenden: Will hardening HMRC hit estate planning?

You cannot have failed to have picked up on the strong climate of Government aggression to tax avoidance that is, in its eyes at least, “repugnant” or “unacceptable”. Over time, supported by the tribunal and court system on the one hand and strong publicity on the other, this expression and demonstration of official intent to stamp out this type of avoidance is likely to influence taxpayer behaviour.

Even now, the strength of expressed official intent and publicity given to many forms of “officially unacceptable” avoidance may have already started to reduce or entirely remove taxpayer willingness to enter into avoidance schemes that are perceived as perhaps too good to be true.

This may be especially so if they are promoted in relation to high-profile areas of taxation. For example, stamp duty land tax or income tax and NIC mitigation through employee benefit trusts or similar structures. If you do not believe me, ask fans of Glasgow Rangers. I had a conversation with one (who is also, along with his wife, an Arsenal Red Member) in a pub by the Britannia after the Stoke game. His knowledge of EBTs and how they were used to ostensibly save tax was encyclopedic.

Most Treasury and HM Revenue & Customs’ anti-avoidance activity is understandably directed at arrangements aimed at helping to avoid income tax, National insurance contributions, corporation tax and VAT.

In relation to capital taxes, capital gains tax avoidance schemes have attracted a fair amount of anti-avoidance activity over the years. Inheritance tax has also had its own share of legislation to shore up receipts, most notably the gift with reservation and pre-owned assets tax provisions.

Trusts have been hit with provisions having an impact on all tax planning, with the retail financial planning sector concentrating on provisions affecting the use of trusts in estate planning.

What effect does the hardening climate have on estate planning arrangements? There is no indication that tried and tested arrangements, such as loan trusts and discounted gift trusts will be in any way adversely affected. It seems tolerably clear they do not even need to be subject to the disclosure of tax avoidance (Dotas) provisions – HMRC already knows about them.

Despite this, it may well be that with the general climate being perceived as being less than welcome to avoidance, the use of simple protection plans held in trust to meet (but not substantially reduce) the IHT liability may, just may, increase in popularity.

Given that these plans, through the ready provision of funds to meet the IHT bill, are effective cashflow generators for HMRC, the risk of them being attacked must be minimal. Just a thought on how they might be promoted – but without in any way casting aspersions on the continued tax effectiveness of loan plans and DGTs.

While, self-evidently, a best practice approach should incorporate an investigation of reduction opportunities first and provision second some, when made aware of the way in which protection in trust can simply provide for the liability, (regardless of the benign nature of the life policy/trust combination in relation to HMRC attack) may even choose to pay for this solution rather than adopt a gift/trust-based strategy.

In typical family cases, if life cover is adopted as part of the estate planning solution, the appropriate cover would be a last-survivor plan held subject to a discretionary trust. The premiums would usually be exempt under the normal expenditure out of income exemption and the sum assured would be tax-free.

How likely is HMRC to attack a strategy that does not substantially reduce the taxpayer’s estate (save for the premiums gifted) but provides a pool of cash to meet the liability to IHT in good time which will, as a necessary and valuable by-product, facilitate a rapid and smooth payout to the deceased’s beneficiaries? Very unlikely, it is thought.

And to close, if we do indeed get a general anti-abuse rule how important (as a “hygiene” factor) will it be for an avoidance scheme to have received clearance to stand any chance of successful distribution? I will leave that one with you to ponder.

Tony Wickenden is joint managing director of Technical Connection



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. It would appear that certain firms are going to agressively market QNUPS to UK Dom & Res, claiming that it is free of IHT. HMRC have a raft of anti-avoidance legislation in their armoury to challenge all such schemes, so unless it can be justified as a ‘top up’ pension arrangement, and that was the prime purpose of establishment, a lot of beneficiaries will be sorely dissapointed. HMRC can tie up a whole estate whist arguing with the executors as to the validity of such arrangements.

  2. Anonymous you are so right. I had an email just today from a client of mine who is well connected and knowledgable telling me that a contact of his has told him he must have a QNUPS.

    He is not currently funding his pensions at all let alone being close to the annual allowance even before we think about carry forward, he is not and does not intend to go abroad & anyway there is no immediate IHT concern.

    Yet again I felt like a “killjoy” when I explained why he didn’t need one….Oh well another “sale” I have not capitalised on….

  3. Bethell Codrington 14th June 2012 at 5:43 pm

    “If it sounds too good to be true …..” This is another mis-selling scandal about to happen being flogged by reckless Trustees and Life Companies to the wrong audience. What do they care? The tax liability sits with the client notthem

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