Inheritance Tax Planning and DOTAS

The DOTAS regime was originally introduced in 2004 to enable HM Revenue & Customs to acquire information about marketed tax avoidance schemes. Arrangements only have to be notified if they fall within certain ‘hallmarks’. These include indicators such as whether the promoter is charging a premium fee or whether they ask clients to sign up to some sort of confidentiality agreement.

Specific hallmarks were introduced to combat schemes in particular areas such as the use of losses, tax avoidance using financial products and attempts to get round the disguised remuneration rules for employment income.

The DOTAS rules were first applied to inheritance tax in 2011 and currently they only apply to arrangements which are designed to transfer assets into a trust without paying the upfront 20% lifetime inheritance tax charge.

However, the proposed new regulations which will apply to inheritance tax are much wider than that. The starting point is that any planning which gives rise to an inheritance tax advantage will have to be notified if it contains steps which are ‘contrived or abnormal’.

The problem with inheritance tax planning is that much of what is done could easily be described as ‘contrived or abnormal’ – i.e. the steps which are taken are not ones which somebody would normally take, unless they were trying to reduce their inheritance tax bill.

HM Revenue & Customs has promised guidance as to what it considers to be acceptable and what is not, the risk is that individuals who wish to take prudent steps to mitigate their exposure will be left not knowing whether what they are doing has to be notified. Many will make notifications just to be on the safe side. HM Revenue & Customs may well be overwhelmed with a deluge of pointless notifications as a result.

It seems logical that the same approach should be taken for inheritance tax as for other taxes. This would mean that HM Revenue & Customs should identify specific areas where it sees abuse, and create hallmarks relating to those areas rather than attacking all planning which gives rise to any inheritance tax advantage. That would make the tax system unworkable.

The existing hallmark could ultimately be extended to include planning to avoid the reservation of benefit rules without incurring pre-owned assets tax, acquiring interests in excluded property settlements without falling foul of the existing anti-avoidance rules, abuse of agricultural property relief or business property relief and schemes to avoid inheritance tax ten year charges in relation to relevant property trusts.

The consultation period ended earlier this month and so we await developments. In the meantime you may wish to consider my forthcoming book, ‘The Absolute Essence of Inheritance Tax Planning’ –

Publication is anticipated to be next month, August 2016.

Where you are going wrong with inheritance tax planning –