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HMRC recently introduced a new “hallmark” to the Disclosure of Tax Avoidance Schemes (DoTAS) regime with a view to closing the inheritance tax avoidance gap. The scope of the new hallmark is very wide, and consequently, any inheritance tax planning should be carefully considered in light of that hallmark, particularly as HMRC are actively pursuing taxpayers in the courts.
The DoTAS rules were introduced in 2004 and have provided HMRC with a powerful weapon to combat tax avoidance schemes which while legal they consider to be contrived and artificial.
The DoTAS regime places an obligation on scheme promoters (and, less commonly, scheme users) to disclose information regarding ‘notifiable’ schemes to HMRC. In most circumstances, notifiable arrangements must be disclosed within five days of certain trigger events such as making the scheme available for implementation by another person.
Following disclosure of a scheme to HMRC, they will issue a Scheme Reference Number (“SRN”) specific to those arrangements. That number must then be disclosed in the tax return of those who use that scheme.
This gives HMRC the upper-hand in identifying those involved in tax avoidance arrangements and the information necessary to mount a challenge, and where necessary, introduce new measures to block those arrangements.
Failure to comply with the regime can result in significant penalties.
The first IHT specific hallmark was introduced to DoTAS in 2011 but this was limited in its application to novel schemes which sought to avoid the inheritance tax entry charge that would otherwise arise on contributions to trusts.
From April 2018 the application of DoTAS to IHT planning is significantly wider. The new hallmark targets an array of arrangements which, in the eyes of the informed observer, meet the following conditions:
1) 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; and
2) The arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.
For these purposes an “informed observer” is considered to be someone who has studied the arrangements and had due regard to all relevant information; they do not necessarily need to be a tax professional.
Condition One – The Main Purpose Test
Condition one states that one of the main purposes of the arrangements is to obtain an inheritance tax advantage. The threshold for ‘arrangements’ is deliberately set very low, and it will often be the case that the tax advantage in any tax planning will be one of the main purposes of that planning.
The advantages listed under condition one include the avoidance or reduction of various inheritance tax charges, whether during lifetime or on death. The use of the word reduction highlights the breadth of these provisions are as this does not impose a motive test. Instead, any arrangements of which the main purposes (or one of) is the reduction of a charge, will qualify under condition one.
This is a common theme in recent anti-avoidance legislation. The objective ‘reduction’ test as opposed to subjective ‘avoidance’ test is odd given the nature of the DoTAS regime is to facilitate the effective challenging of contrived and artificial avoidance schemes – such schemes often requiring some element of motive.
In any event, it is safe to assume that the majority of inheritance tax planning arrangements will be within condition one, not only contrived avoidance schemes
Condition Two – Contrived or Abnormal Steps
The second condition could be considered a filter to the vast array of arrangements which pass through condition one.
The arrangements must be reviewed to conclude whether they involve one or more contrived or abnormal steps and then to consider whether those same steps are necessary to achieve the tax advantage.
To the uninformed observer, the use of trusts and other commercial vehicles may be considered contrived or abnormal. However, the conditions must be considered in the eyes of the informed observer, and therefore it would be expected that most straightforward planning arrangements would not meet this condition and, as a result, although arrangements might result in the reduction of an inheritance tax liability (and therefore satisfy condition one), they need not fall flour of the DoTAS rules.
A new established practice exception replaces the previous grandfathering provisions.
Planning that was made available before 1 April 2018 would not have been notifiable at that time; however, where the same proposal is implemented on or after 1 April 2018, it must be notified.
This seeks to remove planning which is established as being acceptable by the profession and HMRC.
The scope of this hallmark highlights the difficulties faced in tackling tax avoidance and the movement towards a more generalised approach. The increased breadth of DoTAS in the context of this hallmark will require taxpayers and advisers alike to review any Inheritance Tax planning arrangements. The DOTAS guidance can prove helpful in finding HMRCs view, however, some of the examples given appear to be somewhat lacking in detail and therefore unhelpful.
If you have any queries on IHT and DOTAS or any tax matters then please get in touch.