Insights

Tighter inheritance tax (IHT) disclosure rules became operational on 1 April 2018, requiring any IHT planning arrangements which meet certain conditions to be disclosed to HMRC under the DOTAS (disclosure of tax avoidance schemes) rules. Detailed guidelines have now been issued, explaining exactly how the new rules operate, and this blog explains what you should be aware of.

The DOTAS rules were originally introduced to catch anyone who has entered into an ‘arrangement’ specifically to create a tax advantage and thereby reduce the amount of tax they pay. If a tax advantage is the main reason for an arrangement being in place, it is highly likely it will need to be declared to HMRC.

IHT planning first became affected by DOTAS in 2011, but the scope of the regulations was expanded in 2018. There are now two new conditions for the rules (known as the IHT hallmark) to apply. In most cases, tax planning arrangements falling within Condition 1 will not automatically cause Condition 2 to be met and therefore won’t be notifiable. As a general rule of thumb, a disclosure is required if an ‘informed observer’ would conclude that the specific conditions are met.

Here’s what you should know:

Condition 1 - the main purpose, or one of the main purposes of the arrangement is to enable a person to obtain an advantage in relation to inheritance tax. It should be clear whether the main purpose, or one of the main purposes, of the arrangements is to secure one of the listed tax advantages, or whether the tax advantage arises inadvertently as a by-product of the arrangement.

The tax advantages listed under Condition 1 are the avoidance or reduction of IHT charges which would otherwise arise when:
(a) An asset is transferred into a property trust;
(b) An asset is already in trust, when the ten-year anniversary payment is due;
(c) An asset is gifted with a reservation of benefits and no income tax is due;
(d) An asset is transferred to reduce estate value without giving rise to a chargeable transfer or PET.

According to Condition 2, the IHT planning arrangements must also involve making one or more contrived or abnormal steps, in order to secure the tax advantage. Both must be met for the DOTAS rules to be invoked and HMRC has acknowledged that many arrangements will satisfy the conditions of Conditions 1 but not necessarily meet that of Condition 2. Where this is the case, a declaration is not needed.

HMRC has published a lengthy document outlining whether arrangements are DOTAS notifiable or not. What is important to be aware of is that HMRC have significantly increased the level of attention paid to IHT planning arrangements. According to Taxation magazine, this is a “classic example of mission creep’’, because the DOTAS regulations originally set out to eradicate artificial tax avoidance, but as the regime has been extended, that objective has been lost and inheritance tax planning arrangements that would previously be regarded as nothing more than legitimate tax mitigation may now have to be disclosed. Lifetime giving strategies remain as relevant as they have always been but anything that might raise question marks and or eyebrows should be avoided.