'A-ttacks' on IHT planning?

Bookmark and Share
31 March 2011

Three recent announcements suggest that inheritance tax and schemes to avoid it are coming under ever greater scrutiny.

'Double Trust ' Home Loan Schemes

Up until the introduction of the pre-owned asset tax (POAT) charge in 2006, home loan schemes were used by more adventurous taxpayers to try and shelter the value of their homes from inheritance tax (IHT). Although some schemes have since been unravelled many remain in existence where the taxpayer has decided that payment of the POAT is worthwhile provided the scheme still works to avoid IHT.

However HMRC have recently changed their view and they now say that such schemes do not work to save IHT.

Without going into the detail of the structure of these schemes (of which there were a variety), they essentially involved homeowners selling their houses to one trust and the trustees of that trust giving an IOU to the homeowner in place of the sale proceeds.  The IOU is then 'gifted' by the homeowner to another trust. 

If the taxpayer survived 7 years from the date of the gift, it was generally accepted that (and indeed HMRC's original guidance supported this), if correctly drafted,  the value of the property fell out of their estates for IHT purposes, yet they continued to be able to live in their home. 

What is HMRC's approach now?

HMRC seem to be throwing the kitchen sink at these schemes with a number of arguments to support their new position

Are they right?

There is currently a test case underway and all schemes are waiting the outcome of this. Many distinguished commentators think HMRC could lose.

Disclosure of Tax Avoidance Schemes (DOTAS)

The DOTAS legislation was first introduced in 2004 and it requires that any arrangements to avoid tax need to be disclosed to HMRC, although the implementation of the legislation for different taxes has been staggered.  As from 6 April 2011, it will extend to IHT.

What does this mean for tax planning?

Are taxpayers going to have to disclose any steps they take to mitigate their IHT liability to HMRC?

The rules catch any tax-planning schemes that involve a transfer of property into a 'relevant property' trust and, as a result, a charge to IHT is avoided, reduced or deferred.

This would appear to include any form of tax-planning that uses trusts (relevant property trusts include almost all new trusts and many old ones) and therefore gives plenty of food for thought both for taxpayers and tax advisors alike.  However:

  1. It only relates to a transfer of assets into a trust.  It does not include steps taken to reduce IHT charges arising on ten year anniversary dates or on capital payments to beneficiaries of a trust.
  2. It does not include schemes that were in use before 6 April 2011.  This is a major exclusion. 
  3. It does not include schemes that utilise straightforward statutory reliefs such as Agricultural Property Relief and Business Property Relief.

HMRC are due to publish detailed guidance on what schemes will or will not have to be disclosed which should add some clarity although it appears that DOTAS will not affect IHT as much as some feared.

'ROOT AND BRANCH' Review of Inheritance Tax and Taxation of Trusts

The Treasury's Office of Tax Simplification have recently recommended a full review of the inheritance tax legislation and the taxation of trusts.

They argue that any review of the available inheritance tax reliefs needs to be carried out in the context of the wider rationale of the legislation, as well as including a review of the taxation of trusts.  It may also extend to a review of capital gains tax.

Given the size of the task, it may be some time before any changes emerge, however it looks like change may be on the horizon.

For further information, please contact Tom Hewitt on +44(0)117 902 2717 or email tom.hewitt@burges-salmon.com or Michael Westbrook on +44(0)117 902 7740 or email michael.westbrook@burges-salmon.com

Search news archive