Extension of DOTAS rules to Inheritance Tax planning

What is DOTAS?

In order to assist them with tackling tax avoidance, HM Revenue & Customs (HMRC) put in place the Disclosure of Tax Avoidance Schemes (DOTAS) rules in 2011, under which certain schemes must be disclosed to HMRC. There are various tests which help to determine whether a particular scheme needs to be disclosed. In general, this regime applies to aggressive or artificial schemes. We believe that the days of the mass marketed schemes are over and prefer to focus our efforts on planning that is robust, seeking to utilise the reliefs and planning opportunities based upon the legislation currently in force rather than focusing on subjective and sometimes speculative planning that is designed to exploit perceived loopholes. As such, the planning we offer does not fall under DOTAS.

With regard to Inheritance Tax (IHT), the schemes which currently fall under DOTAS are those which involve property being held on relevant property trusts where the main benefit is a reduction of the IHT entry charge. Schemes which are the same as those made available prior to 6 April 2011 do not need to be disclosed.

What changes are being brought in?

There have been few disclosures under the current DOTAS in respect of IHT, and as such HMRC are currently consulting on extending the scope of DOTAS for IHT purposes. It is proposed that either:

  1. The existing IHT test will no longer be narrowly focused on trust entry charges, being aimed instead at any arrangement “designed to avoid or reduce an immediate charge to inheritance tax”; or
  2. There will be a requirement to disclose arrangements where there is any intention for a reduction / avoidance on death; or
  3. IHT will be included in some of the general tests.

The consultation document further states that only arrangements which “an informed observer could reasonably conclude are an IHT avoidance scheme or arrangement” would be disclosable under DOTAS.

Any new rules will only apply to schemes which are entered into after the changes take affect and will not apply to those already in place.

How might this affect me?

The consultation states that the aim is not to catch the “straightforward use of reliefs and exemptions” but rather “particularly innovative” or artificial schemes. However, the issue is how the legislation is drafted and whether some uses of reliefs and exemptions may end up being caught under the legislation, whether or not that was the intention.

For example, what level of understanding and knowledge would you attribute to an “informed observer”? What would constitute an IHT avoidance scheme? What one individual may consider to be tax avoidance may to another person be simple acceptable planning. This will mean that should the proposals be brought in, there will be a great deal of uncertainty in the initial years as the interpretation of the legislation is developed through case law.

It was once said to be the case that a person should be able to arrange their affairs in such a way that they pay the legal minimum amount of tax. Tax legislation is more complicated than ever, and with legislation relating to tax avoidance becoming wider in scope it is becoming more difficult to be certain that arranging your affairs in a tax efficient way will not be caught under the avoidance legislation. The concern is that the legislation is drafted so wide that it may end up covering simple planning which does not in itself amount to tax avoidance.

Emily Harrison, Assistant Tax Consultant

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