The furore over David Cameron’s personal investments, and his mother’s gift to him of £200,000 following her husband’s death, now seems to have died down, and the media have moved on as they almost always do. This episode, and the general climate currently prevalent around tax planning, throws up interesting questions as to what is and is not considered acceptable in pursuit of minimising an individual’s potential inheritance tax (IHT) liability.
Some light has perhaps been thrown on this subject by the publication recently of a further consultation on the government’s attempts to formulate an IHT “hallmark” under the Disclosure of Tax Avoidance Schemes (DOTAS) regime.
The DOTAS regime requires taxpayers and their advisers, and the promoters of tax avoidance schemes to disclose these schemes to HMRC. which can lead to a HMRC challenge of the lawfulness of the scheme, and a request for advance payment of the tax due (known as an accelerated payment notice) if the scheme fails.
IHT has been affected only minimally by DOTAS to date but in July 2015 the government published a proposed IHT “hallmark”, a standard by which a scheme should be judged, to determine whether or not it should be disclosed. This hallmark was very wide in its potential applicability and, in the view of many practitioners, would have caught ordinary tax planning arrangements if implemented. This was clearly not the government’s intention as it was then announced that a revised hallmark would be produced and this has now been published as part of this consultation.
Under the revised hallmark, for a scheme to be notifiable, two conditions would both have to be met:
- The main purpose, or one of the main purposes of the arrangements is to enable a person to obtain a tax advantage; and (crucially)
- The arrangements are contrived or abnormal or involve one or more contrived or abnormal steps without which a tax advantage could not be obtained.
It is made clear in the consultation document that ordinary tax planning arrangements (including gifts to individuals, gifts into trust or investing in property which has the benefit of IHT relief, such as business property) will not be disclosable as there is nothing contrived or abnormal about this type of IHT planning. It is considered acceptable, therefore, for a parent to make a gift of surplus assets to a child in the hope that he or she will survive seven years so that the value of the gift falls outside the IHT net; or for that same parent to set up a trust for their grandchildren’s education, or to choose to invest in shares in a company listed on AIM, which qualifies for IHT Business Relief (rather than in fully quoted shares, which do not). Making a Will in the most tax advantageous way also falls outside the remit of DOTAS as do many popular IHT planning financial products.
A contrived scheme which also saved IHT would, however, be disclosable. The consultation document gives the example of an individual making a gift into trust of over £325,000 (which would normally attract a 20% IHT entry charge) and also making an attempt to circumvent the entry charge. It would seem therefore that “clever” schemes might fall foul of the proposed new hallmark but an individual implementing straightforward IHT planning, including the use of trusts and ensuring that reliefs are maximised, will be acting in a way deemed not to be disclosable and, by analogy, in a way which is, on the face of it, acceptable to HMRC.