From 1 April 2018, the Government is introducing new measures to scrutinise inheritance tax (IHT) planning arrangements.
Tighter controls on IHT planning will be implemented as a result of amendments to the Disclosure of Tax Avoidance Schemes (DOTAS) regulations. First introduced in 2004, DOTAS applies to a multiplicity of taxes including capital gains tax, income tax and corporation tax. DOTAS acts as an ‘early warning system’ for HMRC. It must be notified about certain tax avoidance arrangements at an early stage, to ensure sufficient time is available to review and challenge, where necessary, their creation. For IHT purposes, the rules (introduced in 2011) are currently narrowly focused and apply to those arrangements which seek to avoid IHT charges when certain lifetime trusts are created.
The planned changes will result in greater scrutiny of more complex IHT tax planning arrangements. DOTAS rules will now apply to those plans whose main purpose is to obtain a tax advantage and whose structure involves one or more contrived or abnormal steps without which the tax advantage could not be obtained. HMRC recognises these provisions are wide-ranging and has introduced safeguards to ensure a targeted, measured application of the rules. DOTAS requires, for example, that an ‘informed observer’ must determine whether it is reasonable for an arrangement to fall within its scope.
It is important to comply with the IHT DOTAS regime. Failure to do so can lead to penalties, but is not a criminal offence.
Despite the changes being days away, HMRC has only today issued updated guidance on the reforms. It does provide a number of real-life examples, all of which emphasise HMRC’s increased focus on more complicated IHT planning arrangements. To mitigate concerns about the new regime, HMRC has stated in both the guidance and earlier consultation papers that it should not affect normal or straightforward IHT planning. New arrangements created after 1 April 2018 will also be exempt provided they fulfil certain criteria. Such arrangements must be substantially the same as those created before that date and HMRC must have accepted that the pre-existing arrangements are in accordance with established practice.
IHT planning remains an important option for all assets, although more sophisticated, complex arrangements may need review to determine whether they fall within the DOTAS regime. Given the complexity of these proposals, it is important to seek legal advice before IHT planning is undertaken.