Government temporarily backs off from plan to extend DOTAS to Inheritance Tax planning

In a most welcome move HM Revenue & Customs has temporarily shelved plans to extend the Disclosure of Tax Avoidance Schemes (DOTAS) regulations to cover most types of inheritance tax planning.

In light of criticism from tax advisers, accounting and law firms, as well as the Society of Trust and Estate Practitioners and the Chartered Institute of Taxation, the government has backed down on its initial plans to include inheritance tax within the new framework to change existing DOTAS rules governing the hallmarks describing schemes which must be disclosed .

The ‘draft hallmark’ measures were published for consultation in July 2015. They set out that an arrangement would in future fall under DOTAS if its main purpose, or one of its main purposes, was to obtain an inheritance tax advantage, and if it were ‘contrived, abnormal, or unlikely to have been made if there were no tax advantage’. Arrangements made as part of a Will were explicitly excluded, but almost any other form of tax planning – even lifetime gifts to family members – could have been caught.

The broad scope of the proposals drew heavy criticism from professional bodies – especially in view of the fact that schemes caught by DOTAS are now subject to HM Revenue & Customs accelerated payments regime, which requires individuals to pay any disputed tax before any court or tribunal has ruled on the matter.

HM Revenue and Customs has accepted the force of these criticisms, and has left the inheritance tax hallmarks out of its latest revision of the DOTAS rules –

‘Respondents were consistent in their view that the drafting of these goes too wide and risks catching ordinary inheritance tax planning products that are not abusive’, says the published summary of consultation responses. ‘The government recognises these concerns. It remains committed to updating the IHT hallmark, but in a way that is tightly targeted and does not catch ordinary, non-abusive, tax planning.’

The new DOTAS regulations issued this month thus do not contain the inheritance tax hallmark proposals.

Instead, the Government will develop a revised draft inheritance tax hallmark, for further consultation later this year.