DOTAS SCOPE CREEP - TURNING THE SCREWS ON INHERITANCE TAX
The Inland Revenue (HMRC) have released a series of consultation papers including a paper to bring Inheritance Tax (IHT) into the scope of the UK disclosure of Tax Avoidance Schemes – the “DOTAS” regime. This consultation closed this week and the draft regulations are expected to come into effect in April 2011.
This is particularly relevant to estate planners and to their clients because the most basic trust structure may also have a beneficial Inheritance tax impact which means that there is a disclosure requirement and a strict compliance routine to adhere to.
The DOTAS disclosure regime was introduced on 1 August 2004 and IHT was on the list of taxes that could be subject to the disclosure rules. However, since its introduction there has been no mention of bringing IHT into the regime. Under Gordon Brown’s stewardship, there has been a growing government disquiet of the use of Trusts and the use of tax avoidance schemes in connection with the transfer of property into trusts to avoid IHT and so it should not really be a surprise that IHT is to be swept into the DOTAS administration.
The initial coverage of DOTAS was Income Tax, Capital Gains Tax and Corporation Tax, and was limited to schemes that concerned employment and certain financial products. The main regime was extended to the whole of income tax, CT and CGT with effect from 1 August 2006 and the descriptions of schemes to be disclosed revised into a series of 'hallmarks' targeting new and innovative schemes or certain known high risk areas. Once the Revenue knows about these schemes, it can decide whether it wants to take steps to block them. This early warning system has had to be tweaked over the years and further amendments are included in the recent budget. This is fully consistent with other rushed measures introduced over the last 10 years which generally have not been given sufficient time for consultation and parliamentary review. No one should be surprised that the New Anti avoidance rules need their own Anti avoidance regulations!
For HMRC the great concern is the so called “tax gap” in so far as it relates to IHT and the fact that they believe that there is still regular and continuing activity to develop new schemes using Trusts. The "tax gap" is the shortfall between what HMRC believes should be paid and the revenues eventually collected. The introduction of the DOTAS regime means that the Revenue are looking to close the tax gap by trying to find out what schemes are “out there” rather than identifying who are the users of such schemes.
This approach closes the second hole “ the information gap” which is particularly relevant for IHT as there is usually a considerable time lag between the client entering into an arrangement and the time when that arrangement is actually implemented. Without getting information in advance the Revenue cannot take action or legislate against such schemes in structured and timely manner.
The stated objective of this extension of the DOTAS regime to a targeted area of IHT is to counter avoidance by obtaining:
1. early notification of new and innovative anti-avoidance schemes that have been developed and details of how they work to inform loophole-blocking; and
2. details of who has used such schemes to inform HMRC’s compliance activities.
However, estate planning advisers should not panic yet as the proposals do not apply to existing arrangements, and would only extend as follows:
1. The proposed regime would apply to arrangements which involve ‘relevant property’ (e.g. discretionary trusts) and only in relation to the IHT entry charge. It does not apply to the 10-yearly and exit charges. This means that any lifetime transfers or transfers as a result of a death are covered.
2. HMRC is only interested in being told about new schemes, not schemes of which it is already aware. The draft amending regulations contain a ‘grandfathering’ rule that exempts any scheme that was available before a given date (which has yet to be determined).
The submission date for replies to the paper is closed. As always for HMRC, the key issue will be getting the scope right while making sure that the regime is workable. The danger of “scope creeping” for the DOTAS regime is that the emphasis on the DOTAS structure designed to cover complex tax avoidance is being shifted and extended to include structures that might be viewed simply as normal and legitimate tax planning.
Once more the new proposals confirm the need to get professional tax advice at the right time. Dabbling with inheritance tax planning can be dangerous for your wealth!
William Feeny is a Director of Kings Court Trust Corporation. He can be contacted on 0800 496 9000 or email him on william.feeny@trustcorporation.com.