Inheritance Tax in the spotlight
It has long been the case that HM Revenue and Customs (HMRC) has targeted avoidance of the main taxes on a regular and consistent basis. In contrast, and until relatively recently, inheritance tax (IHT) has not featured very publicly and to any great extent in the anti-avoidance campaign, even though it has undergone many changes including the trust changes contained in Finance Act 2006 and amendments to debt relief. More changes are expected following the recent consultation on the taxation of trusts.
This focus on IHT however seems set to be stepped up amid widespread comment that HMRC are to target IHT avoidance. Details of this are thin but it should certainly not be taken for granted that IHT will continue to be (if indeed it still is) the sleeping tax compared to other taxes.
HMRC has said “There is a risk that IHT attracts those who wish to abuse the tax system by engaging in tax avoidance activity“, and it seems anxious to close loopholes by looking to catch schemes implemented during lifetime that are designed to reduce estate values. These might include, for example, planning that seeks in HMRC’s eyes to escape detection, such as that using offshore based trust arrangements.
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Such IHT arrangements have assumed a higher profile, coinciding with the possible decline in other tax avoidance mechanisms, as promoters see an opportunity which has not yet been exploited to the full. This increased public awareness gives perhaps further reason to believe that HMRC might seek to tighten the IHT code as the scale of implementation increases. One only has to consider the changes to Stamp Duty Land Tax which were almost certainly triggered by the wide scale use of planning.
As part of its anti-avoidance drive against IHT, HMRC is proposing to introduce accelerated payments for IHT for “a minority of very wealthy people” who actively seek to avoid IHT payments. It is understood that the accelerated payments will not apply more widely to IHT trust charges, unless that trust arrangement is a DOTAS disclosed tax avoidance scheme.
It should be recognised that this is happening against the background of the increased information sharing, cooperative international political pressure and the fact that IHT planning is often long-term which can render it vulnerable to changes in legislation. Add to this the accelerated payments initiative and the fact that the GAAR (General Anti Abuse Rule) also applies to IHT (as yet untested), and it all adds up to a challenging environment in which to carry out any planning which goes beyond the use of generally acceptable exemptions and reliefs.
It is worth noting that as a response to the changing environment, the FT reports that HMRC believes that some promoters are considering shielding clients by not disclosing avoidance schemes. This will clearly be of concern to HMRC, and might lead to tighter rather than laxer controls and measures.
It is to be hoped that if HMRC are given greater powers, it will be careful when implementing them so as not to penalise arrangements which have been implemented for sound non-tax reasons, such as asset protection or wealth preservation/management purposes. It is safe to assume that there will be a good deal of discussion between HMRC and the professions over the coming months to clarify the scope of any changes and their implementation and these should be followed closely.
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