ESTATE PLANNING, INHERITANCE TAX & DOTAS
As highlighted in my blog post of 1st September, new measures extending the disclosure of tax avoidance schemes (DOTAS) regulations to cover inheritance tax planning were published for comment on 16 July 2015. They provide that an arrangement will in future fall under DOTAS if its main purpose, or one of its main purposes, is to obtain an inheritance tax advantage, and if it is ‘contrived, abnormal, or unlikely to have been made if there were no tax advantage’. Consultation on the measure closed on 10 September.
The danger inherent in the proposed regulations is that they are too broadly drafted such that DOTAS may even apply to gifts to family members that previously would not have been considered as inheritance tax planning AND with good reason. They are often just part of everyday family life. For instance, there is no requirement currently to report lifetime cash gifts (aka potentially exempt transfers or ‘PETs’) unless they are, or become, chargeable. The new regulations, however, imply that a simple PET – which is normally regarded as perfectly uncontentious estate planning – could be immediately reportable under DOTAS.
Although the proposed regulations do contain a specific exclusion for estate planning measures written into a Will or Codicil, this fact in itself is a clear indicator that the regulations are too widely drafted as they stand.
A further implication is that if DOTAS extended to inheritance tax in this manner it will then apply to all solicitors, many of whom have no experience of DOTAS, and who may consider that it conflicts with the well established principle of legal privilege.
These regulations will be of no practical use to HM Revenue & Customs if they result in Inspectors receiving a huge number of disclosures, because that does not efficiently tell them what they really want to know. Rather than trying to bring everything in to DOTAS and then having specific and poorly thought through exceptions it would be much better for everyone concerned if the areas regarded as unacceptable inheritance tax planning were identified and then frame the legislation to catch these.
When DOTAS was originally introduced in 2004, it merely imposed a duty on promoters and users of marketed tax avoidance schemes to notify HM Revenue & Customs about the scheme’s nature. Now, however, a scheme that is ‘DOTAS hallmarked’ renders the user liable to receive an accelerated payment notice, forcing the taxpayer to pay in advance whatever sum HM Revenue & Customs considers to be the tax due. There is no appeal against this. Moreover, the fact that someone has used DOTAS-registered tax planning can now be applied as a test in deciding whether that person is a fit and proper person to be a charity’s trustee.
As they stand these proposals are highly controversial and require considerable amendment and the use of serious judgement before they can be regarded as fit for purpose.