Indistinct IHT hallmarks risk blurring DOTAS

Mon 14 Sep 2015

On 16 July 2015 HMRC published draft Regulations containing the proposed IHT hallmarks for DOTAS ( Disclosure of Tax Avoidance Schemes) purposes. These have attracted attention and criticism because of the breadth of their potential application.

Consequences of arrangements being reportable to HMRC under DOTAS may include HMRC issuing accelerated payment notices to users of arrangements falling within the prescribed descriptions.

The Hallmarks

The draft Regulations refer to arrangements falling within the scope of these provisions where:

• it could appear to an ‘informed observer’ that the main purpose or one of the main purposes of the arrangements was to obtain an IHT advantage, and either:

• one or more elements of the transaction would not have been entered into but for obtaining the advantage, or
• the arrangements contain one or more contrived or abnormal steps without which the tax advantage could not be obtained.

A ‘tax advantage’ for DOTAS purposes means:

• tax relief or increased relief;

• repayment or increased repayment of tax;

• avoidance or reduction of a tax charge, an assessment to tax or a possible assessment to tax;

• deferral of a tax payment or advancement of a repayment; or

• avoidance of any obligation to deduct or account for tax.

Limited exceptions

The exceptions provided in the draft regulations are limited to:

• wills and codicils to wills;

• ‘plain vanilla’ trust arrangements for life insurance policies written on or transferred into trust; a settlement of, or including, rights under a contract of insurance where the trust or insurance contract terms reserve to the settlor only indefeasible entitlement to the proceeds of single premium insurance policies with fixed maturity dates, or pre-determined capital payments, if the settlor is alive at the prospective payment date, in other words; and

• loans to trustees that are repayable on demand.

Areas of uncertainty

Areas left uncovered by these regulations could include cases such as:

• normal expenditure out of income;

• parents choosing to give their children agricultural land by means of a potentially exempt transfer (PET) using agricultural property relief non-relievable assets;

• structured investments such as those involving AIM shares that offer the potential for business property relief (BPR);

• switching investment policy by buying AIM shares to get BPR;

• redirecting property to a widow following intestacy;

• a non-dom setting up a trust before completing their 17th year of UK residence;

• converting loan-stock to private company shares;

• setting up a lifetime NRB discretionary trust every 7 years;

• giving away a house and paying a rent to go on living there- even where subject to the pre-owned assets tax (POAT);

• giving assets to a spouse whose life expectancy is greater; or

• trustees investing in agricultural land 2 years before the trust hits a 10-year anniversary IHT charge.

These imponderables may be resolved in consultation or may be subject to guidance but this is an area to be watched with interest.