IHT Planning? HMRC Want To Know!
By Mark McLaughlin
Mark McLaughlin highlights the tightening of requirements for the disclosure of IHT planning arrangements to HMRC, which is aimed at requiring more planning schemes and arrangements to be disclosed to HMRC than before.
HM Revenue and Customs (HMRC) want to find out about new tax avoidance and ‘unacceptable’ tax planning arrangements as soon as possible, so that anti-avoidance rules can be introduced to block any schemes and arrangements as it considers appropriate.
Out with the old…
The disclosure of tax avoidance schemes (DOTAS) rules were introduced in Finance Act 2004. They originally applied to arrangements prescribed in regulations relating to schemes involving income tax, corporation tax, and capital gains tax.
The DOTAS rules were extended to inheritance tax (IHT) from 6 April 2011. Those rules were broadly intended to detect certain types of IHT avoidance arrangements involving the use of ‘relevant property’ (e.g. discretionary) trusts, where a main benefit of the arrangements was obtaining a reduction in the IHT ‘entry’ charge that might otherwise arise on the creation of such trusts.
More IHT planning ‘caught’
The ‘old’ DOTAS regulations for IHT purposes were recently replaced with much wider ones, resulting in the need to consider the disclosure of IHT planning arrangements in many more circumstances than before.
Under the ‘new’ rules (Inheritance Tax Avoidance Schemes (Prescribed Description of Regulations) Regulations 2017, SI 2017/1172), IHT planning arrangements are ‘caught’ under DOTAS if it would be reasonable to expect an informed observer, who has studied the arrangements and having regard to all relevant circumstances, to conclude that two conditions are met:
Condition 1 - A main purpose of the arrangements is to enable a person to obtain an IHT advantage in relation to one or more of the following:
(a) the avoidance or reduction of an IHT ‘entry’ charge that would otherwise arise when an asset is transferred to a relevant property trust;
(b) the avoidance or reduction of certain IHT charges that arise in respect of trusts (e.g. on ten-year anniversaries), and in connection with ‘close’ (i.e. broadly closely-controlled) company transfers;
c) the avoidance or reduction of IHT charges under the ‘gifts with reservation’ anti-avoidance rules in circumstances where there is also no income tax charge under the ‘pre-owned assets’ income tax anti-avoidance rules;
(d) a reduction in the value of a person’s estate without giving rise to a chargeable transfer or a potentially exempt transfer.
Condition 2 – The arrangements involve one or more ‘contrived or ‘abnormal’ steps without which the tax advantage could not be obtained.
Both conditions must be met for an IHT planning arrangement to require disclosure to HMRC under DOTAS. It is acknowledged by HMRC that there will be many commonly used tax planning arrangements that fall within any of (a) to (d) in Condition 1 above, but which will not cause Condition 2 to be met. Those arrangements are therefore not notifiable.
Excepted IHT planning?
The new rules generally apply from 1 April 2018. However, there is an ‘established practice’ exception to the disclosure requirements where certain conditions are both satisfied. These are broadly:
(a) the IHT planning arrangements implement a proposal which has been implemented by ‘related arrangements’ (i.e. arrangements entered into before 1 April 2018, which at the time accorded with established practice of which HMRC had indicated their acceptance); and
(b) the arrangements are substantially the same as the related arrangements.
However, even if IHT planning arrangements satisfy the above conditions, they also need to be tested against the ‘confidentiality’ and ‘premium fee’ hallmarks under the main DOTAS regulations (SI 2006/1543), as those hallmarks were extended to IHT from 23 February 2016.
In or out of DOTAS?
HMRC has published guidance ‘Determining a DOTAS IHT scheme – the tests’ (tinyurl.com/DOTAS-IHT-Guidance). It features examples of arrangements which are not notifiable, might be notifiable and are notifiable.
At one end of the scale, examples of IHT planning arrangements which are not notifiable in HMRC’s view include lifetime gifts to a spouse (or civil partner), or transferring assets worth up to the available nil rate band into trust every seven years. At the other end of the scale, examples of notifiable arrangements include ‘reversionary lease’ arrangements, and the use of employee benefit trusts in certain circumstances.
The new rules for determining whether IHT planning arrangements need to be disclosed are such that many taxpayers and advisers will have to consider the DOTAS rules for the first time. Care is needed, as the new DOTAS rules for IHT purposes could cause uncertainty, and penalties can apply for failing to comply with DOTAS obligations without a reasonable excuse (TMA 1970, ss 98C, 118(2)). HMRC’s guidance may be helpful in some instances. However, most of the examples in HMRC’s guidance of non-notifiable arrangements are black and white ones. There will inevitably be many ‘grey areas’ where HMRC’s guidance is of limited assistance, and careful consideration will need to be given whether or not to disclose IHT planning arrangements in a number of cases.