Following a recently issued consultation document from HMRC, Mark McLaughlin looks at the a potential increase in workload for those involved with IHT planning.
Many practitioners will be aware of the disclosure of tax avoidance schemes (DOTAS) provisions (the primary legislation for which is in FA 2004, Pt 7 as amended, with secondary legislation in regulations), without being particularly familiar with the rules. However, the scope of the DOTAS provisions has gradually expanded since they were originally introduced. The government wants to require the disclosure of more tax avoidance arrangements, and intends widening the DOTAS provisions still further (see below).
The question of whether a scheme or arrangement is notifiable under DOTAS has assumed greater significance since the introduction of accelerated payment notices (APNs) in Finance Act 2014. This is because HM Revenue and Customs (HMRC) can only issue an APN if certain conditions are satisfied (ie Conditions A to C in FA 2014, s 219). Condition C is that one or more of certain requirements are met, which include that the arrangements are DOTAS arrangements.
Inheritance tax (IHT) was introduced into DOTAS in April 2011, albeit only in certain relatively limited circumstances. However, the government now wishes to require the disclosure of more IHT planning arrangements, by changing the circumstances in which such arrangements are required to be reported for DOTAS purposes. Consequently, more practitioners and lawyers involved in IHT planning for their clients will need to consider whether particular arrangements need to be disclosed under DOTAS.
The story so far…
The IHT hallmark for DOTAS purposes was introduced by regulations (The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011, SI 2011/170) with effect from 6 April 2011. The hallmark was introduced with the intention of detecting certain types of IHT avoidance arrangements involving the use of trusts (see Table 1).
|Table 1 – The IHT hallmark
(The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011, SI 2011/170, Reg 2)‘(2) Arrangements are prescribed if—(a) as a result of any element of the arrangements property becomes relevant property; and(b) a main benefit of the arrangements is that an advantage is obtained in relation to a relevant property entry charge.’
In broad terms, the IHT hallmark requires arrangements to be disclosed if they involve property becoming held on ‘relevant property’ (eg discretionary) trusts, and a main benefit is the avoidance or reduction of an IHT ‘entry charge’ when property is transferred to such trusts.
However, the IHT hallmark is subject to ‘grandfathering’ rules. In broad terms, arrangements which are the same, or substantially the same, as arrangements which were made available before 6 April 2011 do not need to be disclosed under the hallmark. A list of grandfathered IHT arrangements that do not require disclosure under DOTAS is included in HMRC’s DOTAS guidance (see DOTAS Guidance Nov-15 Version, at para 13.7).
HMRC has stated that there have been few disclosures under the present IHT hallmark. A consultation document (‘Strengthening the Tax Avoidance Disclosure Regimes’) was published by HMRC in July 2014, in response to government concerns that the IHT hallmark introduced in 2011 was too narrow in scope. Proposed changes to the DOTAS regulations for IHT purposes therefore sought to widen the hallmark to identify more types of IHT avoidance arrangements.
Draft regulations (The Inheritance Tax Avoidance Schemes (Prescribed Descriptions Of Arrangements) Regulations 2015) were published for consultation on 16 July 2015. The proposed disclosure conditions (see Table 2) were subject only to certain limited exceptions relating to wills or codicils, and certain trust arrangements (ie involving insurance contracts, and gifts and loans).
|Table 2 – The Inheritance Tax Avoidance Schemes (Prescribed Descriptions Of Arrangements) Regulations 2015 (Draft), Reg 2
‘2.—(1) For the purposes of Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes) arrangements are prescribed in relation to inheritance tax if an informed observer, having studied the arrangements and having regard to all the relevant circumstances, could reasonably be expected to conclude that—
(a) condition 1 is met, and
(b) either condition 2 or condition 3 is met.
(2) Condition 1 is that the main purpose, or one of the main purposes, of the arrangements is that a person might reasonably be expected to obtain an advantage in relation to inheritance tax (“the tax advantage”).
(3) Condition 2 is that one or more elements of the arrangements would be unlikely to have been entered into but for the obtaining of the tax advantage.
(4) Condition 3 is that the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.
(5) In paragraph (3), “one or more elements of the arrangements” includes—
(a) a step or steps in the arrangements,
(b) one or more terms or conditions agreed as part of the arrangements, or
(c) the way in which the arrangements are structured.
(6) Arrangements are excepted from being prescribed under this regulation if they are specified in regulation 3.’
However, there was general concern among respondents to the consultation that the scope of the draft regulations was too widely drawn, and would catch ordinary and legitimate IHT planning arrangements and the normal use of reliefs and exemptions. For example, some commentators suggested that straightforward IHT planning, such as an individual making lifetime gifts (i.e. potentially exempt transfers) instead of retaining assets and leaving them in the individual’s will, would be reportable under DOTAS. Such concerns prompted the government to reconsider the scope of the proposed rules.
In the meantime, the DOTAS confidentiality and premium fee hallmarks were extended to include IHT (by The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2016, SI 2016/99), with effect from 23 February 2016, with the aim of requiring more IHT schemes to be disclosed to HMRC.
Where are we now?
HMRC published a further consultation document (‘Strengthening the Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax’) on 20 April 2016, which included amended draft IHT hallmark regulations. The government attempted to simplify the hallmark overall (see Table 3).
|Table 3 - The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements Regulations 2016 (Draft), Reg 3
3.—(1) Arrangements are specified in this regulation if it would be reasonable to expect an informed observer (having studied the arrangements and having regard to all relevant circumstances) to conclude that condition 1 and condition 2 are met.
(2) Condition 1 is that the main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain an advantage in relation to inheritance tax (a “tax advantage”).
(3) Condition 2 is that—
(a) the arrangements are contrived or abnormal, or
(b) the arrangements involve one or more contrived or abnormal steps without which a tax advantage could not be obtained.
The second condition in the previous draft regulations was removed in response to the above concerns that it was too wide and could catch ordinary tax planning arrangements. However, the ‘informed observer’ was retained from the previous draft regulations. Furthermore, the ‘main purpose’ test in the previous first condition was largely retained, in addition to the ‘contrived or abnormal’ test in the previous third condition (i.e. as the second condition in the amended regulations).
The government considers that the requirement for both of the revised conditions to be met makes it much clearer that ordinary tax planning arrangements will not need to be disclosed. However, the amended regulations are arguably still potentially difficult. For example, the terms ‘informed observer’ and ‘contrived or abnormal’ are subjective, and therefore a matter of interpretation and personal judgment. Unfortunately, DOTAS is a self-assessed regime, and it will therefore be up to each promoter (or user, if there is no identifiable ‘promoter’) to consider whether IHT planning arrangements fall inside the conditions and therefore need to be disclosed.
However, the draft IHT regulations include certain ‘let-outs’ or exceptions from the requirement to disclose arrangements under them. These let-outs apply to the following arrangements, as described in a schedule to the draft regulations:
- Loan trusts;
- Discounted gift schemes;
- Flexible reversionary trusts; and
- Split or retained interest trusts.
As indicated above, the IHT hallmark introduced in 2011 was subject to ‘grandfathering’ provisions (see Table 4).
|Table 4 – The IHT hallmark: ‘grandfathering’ provisions (Reg 3)
Arrangements are excepted from disclosure under these Regulations if they are of the same, or substantially the same, description as arrangements—
(a) which were first made available for implementation before 6 April 2011; or
(b) in relation to which the date of any transaction forming part of the arrangements falls before 6 April 2011; or
(c) in relation to which a promoter first made a firm approach to another person before 6 April 2011.
However, the 2011 regulations will be revoked when the new regulations are introduced. IHT planning arrangements which are implemented or sold to clients after the proposed changes take effect will need to be disclosed, even if those arrangements were first made available before 6 April 2011.
HMRC’s consultation period in respect of the draft IHT hallmark regulations published in April 2016 ends on 13 July 2016. The government plans to introduce the amended IHT disclosure regulations later in 2016.
Mark McLaughlin CTA (Fellow) ATT (Fellow) TEP is a consultant to professional firms with Mark McLaughlin Associates Ltd (www.markmclaughlin.co.uk) and an author/editor on numerous Bloomsbury Professional titles including the core tax annuals Mark is also Managing Editor of TaxationWeb (www.taxationweb.co.uk). He can also be contacted via Twitter https://twitter.com/charteredtax and LinkedIn http://www.linkedin.com/pub/mark-mclaughlin/11/811/12.