Disclosure of Tax Avoidance Schemes – Inheritance Tax
The Disclosure of Tax Avoidance Schemes (DOTAS) system was introduced for certain taxes in 2006. Inheritance Tax (IHT) was not included at the start. The objectives of the disclosure rules are to obtain:
- Early information about tax arrangements and how they work; and
- Information about who has used them
which clearly gives HMRC the opportunity to consider their impact and where appropriate to put forward legislation to close a particular scheme down.
With effect from 6 April 2011 schemes which seek to avoid IHT charges associated with the transfer of property into trust come within the disclosure rules. Do you know which matters are affected? Do you know what you are supposed to do?
The LawSkills Monthly Digest
Subscribe to our comprehensive Monthly Digest for insightful feedback on Wills, Probate, Trusts, Tax and Elderly & Vulnerable client matters
Not complicated to read | Requires no internet searching | Simply an informative pdf emailed to your inbox including practice points & tips
Subscribe now for monthly insightful feedback on key issues.
All for only £98 + VAT per year.
The application of DOTAS to IHT is in only one area – the mitigation of the charge to IHT which arises on a transfer of value made by an individual during lifetime as a result of which property becomes relevant property – i.e. a transfer into trust. There are a large number of examples of which HMRC are aware which are not disclosable.
Basic principles of DOTAS
In most cases where disclosure is required it must be made by the scheme ‘promoter’ within 5 days of the scheme being made available. The duty to disclose normally falls on the scheme promoter but there can be a fall back onto the user where the promoter is based outside the UK, or is a lawyer covered by Legal Professional Privilege or there is no ‘promoter’.
S.307 FA 2044 defines who is a ‘promoter’. You may be if in the course of providing services relating to taxation you are responsible for the design of a scheme or you make it available, or organise or manage the implementation of a scheme.
FA 2010 provided HMRC with the ability to seek information about a scheme also from an ‘introducer’; that is, someone who markets a scheme. This might be you or an IFA. There is no obligation on an introducer to provide HMRC automatically with information; this would only be necessary if HMRC serves an information notice on you.
Penalties can apply if a scheme is not disclosed accurately and at the right time.
Is the scheme notifiable for IHT
There are four tests to consider under the IHT Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2011 – SI 2011/170:
- Are the arrangements (including any scheme, transaction or series of transactions), or proposals for arrangements, which result in property becoming ‘relevant property’?
- Are those arrangements or proposals for arrangements such that they enable a ‘relevant property entry charge’ advantage?
- Is the tax advantage a main benefit of the arrangement or proposals?
- Are the arrangements or proposals the same or substantially the same as arrangements or proposals
a. Which were implemented; or
b. Which were made available for implementation; or
c. About which a promoter first made a firm approach to another person
before 6 April 2011?
If the answer to questions 1-3 is ‘No’ and to question 4 is ‘Yes’, then it is NOT a notifiable IHT scheme.
It will be apparent from the above that the IHT scheme is designed to catch new schemes using trusts where property enters the relevant property regime (usually, therefore, trusts created during the taxpayer’s lifetime) and not situations which mitigate against periodic or exit charges or which have been used before 6 April 2011.
As you might expect these tests need a bit further explanation.
What is an “arrangement”? This includes any scheme, transaction or series of transactions – s.318 FA 2004.
“Property becoming relevant property” includes not just property becoming immediately relevant property but which at some point does so as part of the scheme even if it does not remain so.
The definition of “tax advantage” is widely drawn and includes the avoidance or reduction of a charge to tax, a relief or increased relief and the deferral of tax.
Where there are arrangements which result in property becoming relevant property, there is no transfer of value but in the absence of other intervening steps in the arrangements there would have been a transfer of value, disclosure may be required.
The reason why disclosure may not be required is because the situation may be covered by the “grandfathering” rules.
HMRC only wish to know about new or novel schemes so old ones are exempted from disclosure. Most are listed in the Guidance. If you are in any doubt whether a scheme should be disclosed and it does not appear to be ‘grandfathered’ then you should disclose it.
The Guidance includes:
A. Arrangements where property does not become relevant property
B. Arrangements which qualify for relief or exemption
C. The purchase of business assets with a view to transferring the assets into a relevant property trust after two years
D. The purchase of agricultural assets with a view to transferring the assets into a relevant property trust after the appropriate period
E. Pilot settlements
F. Discounted Gift Trusts
G. Excluded property trusts
H. Transfers on death into relevant property trusts
I. Changes in distribution of deceased’s estates
J. Transfer of the NRB every seven years
K. Loan into trust
L. Insurance policy trusts
M. Making a chargeable transfer followed by a PET
N. Deferred shares
O. Items of national importance
P. Pension death benefits
Q. Reversionary interests
R. Transfers of value
S. Gifts to companies
If you have to make a disclosure
- Submit forms AAG1 – AAG5 to HMRC. They can be found at www.hmrc.gov.uk/aiu/index.htm. Disclosure can be made on line or by post to AAG (Intelligence) HMRC, 1st Floor, 22 Kingsway, London WC2B 6NR
- You must supply the name and address of the promoter (you) or if the promoter is a lawyer, the disclosure will be made by the client
- A summary of the proposal or arrangements and the name by which the scheme will be known
- Information explaining the elements of the scheme and how the expected tax advantages arises
- The statutory provisions on which that tax advantage is based.
HMRC will then issue the promoter with a Scheme Reference Number (SRN). The promoter issues the SRN to all clients who use the scheme.
The scheme user who enjoys the IHT advantage must include the SRN on their IHT 100 or on form AAG 4(IHT) and state the tax year in which or the date on which it is expected that the tax advantage will be obtained. This disclosure must be made within 12 months of the end of the month in which the client entered into the transaction.
The introduction of DOTAS represented a powerful system at HMRC’s fingertips when it came to marketed tax avoidance schemes. It is appreciated that not many High Street solicitors develop ‘schemes’ but clearly it is possible that if you provide advice to a client which results in no IHT relevant property entry charge you need a system in place in your firm to know whether what you have created is new and novel and should be reported or whether it is simply an existing scheme of which HMRC are aware and you do not have to notify.
Risk management processes and procedures will need to be in place because if new arrangements are not notified to HMRC within 5 days of the arrangement being designed, not used, there are stiff penalties starting at £5,000. Since lawyers cannot be promoters because of legal professional privilege you will need to get the client to notify – a somewhat awkward situation as they are bound to ask why bother making the arrangements if we have to tell HMRC and they will investigate them and may make the scheme unworkable!
© Gill Steel LawSkills Ltd
FREE monthly newsletter
Wills | Probate | Trusts | Tax | Elderly & Vulnerable Client
- Relevant learning and development opportunities
- News, articles and LawSkills’ services
- Communications which help you find appropriate training in your area