Has HMRC called time on Inheritance Tax planning?

Author: Helena Luckhurst

This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK.

Clients intending to carry out Inheritance Tax (IHT) planning in relation to their assets should consider completing their planning ahead of the 1 April 2018 changes to the DOTAS Regulations, as they apply to IHT.

The Disclosure of Tax Avoidance Schemes (DOTAS) regime is not new but, to date, its application to IHT has been relatively limited.  Not any more.  When it applies, the DOTAS regime requires advisers to notify HMRC of their client’s IHT planning and to provide their client with the number HMRC gives them for that planning.  Of course, this gives HMRC notice of the planning and an opportunity to investigate it, so not surprisingly some clients will be put off carrying out IHT planning if a DOTAS notification needs to be made to HMRC about it.

The DOTAS legislation applies to notifiable arrangements, or proposals, whose main benefit is to obtain a UK tax advantage and which fall within certain hallmarks, including a targeted IHT hallmark.  A key concern about the new IHT DOTAS Regulations (‘The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017’) is that, despite some reigning in from draft legislation previously published, the conditions triggering a notification obligation on the adviser (the IHT hallmark) remain widely drawn.  Both conditions need to be met.

In summary, Condition 1 is that the main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain one or more of the following IHT advantages:

  • the avoidance or reduction of an entry charge on a relevant property trust;
  • the avoidance or a reduction in periodic charges to IHT (these are relevant to trusts within the IHT relevant property regime) and certain IHT charges in connection with employee trusts and gifts by close companies;
  • the avoidance or reduction of an IHT charge arising from the application of the gift with reservation of benefit rules in circumstances where there is no Pre-Owned Assets Tax charge also; or
  • the reduction in the value of a person’s estate without giving rise to a chargeable transfer or potentially exempt transfer for IHT.

Condition 2 is that:

the arrangements involve one or more contrived or abnormal steps without which a tax advantage could not be obtained’.

Unfortunately the Regulations still do not address what constitutes ‘contrived or abnormal’.  The practical implication is that advisers will need to spend time assessing the application of the DOTAS legislation to many more types of IHT planning.  The problem is not one that professional advisers can ignore, because a failure to notify when required will give rise to a penalty and reputational risk.  Ultimately none of this is good news for clients if it reduces the number of advisers in this area.

Grandfathering provisions have been included in the 2017 Regulations after all.  Arrangements do not need to be notified to HMRC if they are substantially the same as arrangements entered into before 1 April 2018 which, at the time of entering into them, accorded with established practice, of which HMRC had indicated its acceptance.  Unless and until HMRC publishes further guidance on this point, advisers must extrapolate what might be considered acceptable from sources such as HMRC’s IHT Manual and perhaps the IHT GAAR Guidance examples, neither of which are remotely comprehensive.

Potentially a significant amount of adviser time and fees will be saved if IHT planning can be completed before 1 April 2018.

Helena Luckhurst, Partner, Fladgate LLP (hluckhurst@fladgate.com)

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