Techzone

Advisers and their clients should have little to fear from HMRCs latest efforts to beef up IHT avoidance measures provided they stick with tried and tested solutions.

Schemes which were established practice prior to 1 April 2018 and which HMRC have indicated their acceptance of, such as Discounted Gift Trusts (DGTs) and Flexible Reversionary Trusts (FRTs), remain free of any reporting obligations under the Disclosure of Tax Avoidance Schemes (DOTAS).

It is worth noting that 'established and accepted practice' is not a generic exemption which can be applied to all DGTs and FRTs. Instead it operates at individual scheme level. This means any future development or innovation within these products will take place under the watchful gaze of HMRC.

Any clients entering into a new or amended scheme which push the boundaries of acceptability could see their details passed to HMRC and flagged as a 'high risk taxpayer'. This further highlights the importance of playing it safe when it comes to estate planning.

What is DOTAS?

The DOTAS rules require promoters of new schemes which are set up to obtain a tax advantage, to disclose the main elements of the scheme to HMRC. As such it acts as an early warning system, allowing HMRC to challenge them if it is believed they are abusive.

What's changed?

There are two key changes to the DOTAS rules.

The first widens what is potentially caught. Schemes which include contrived steps to reduce any relevant property charges (entry/periodic or exit charges) or avoid being treated as a gift with reservation may now be caught.

The second creates a replacement for the 'grandfathering rules' which many familiar packaged estate planning solutions such as Discounted Gift Trusts and Flexible Reversionary Trusts relied upon. But these schemes remain outside the need to report provided they were established practice prior to 1 April 2018 and HMRC has indicated their acceptance of them.

Why does it matter?

Having to report doesn't automatically mean that an arrangement isn't effective. But the reporting process can still cause concern. There are no automatic reporting requirements for advisers.

The reporting falls upon the scheme promoter. They have to submit details of their scheme to HMRC to obtain a scheme reference number. Once up and running they must provide HMRC with lists of clients who have used the scheme.

The reference number has to be passed to any scheme users on HMRC form AAG6. This form pulls no punches and leaves clients in no doubt that they may be involved in tax avoidance and the possible consequences of their actions.

What does it mean for estate planning?

Straightforward gifts into absolute, flexible or discretionary trusts are not affected. There are no additional steps involved and there is no reduction in relevant property charges or potential gift with reservation issues.

Similarly loan trusts (and gift and loan trusts) are established by lending money to the trust and equally do not fall foul of the new tests.

Discounted Gift Trusts
Discounted Gift Trusts generally involve a gift into trust where the settlor retains a right to future payments from the trust. The value of these rights reduces the amount gifted for the purposes of IHT – 'the discount'.

This discount reduces the relevant property entry charge. In addition the settlor can continue to enjoy the retained payments without causing a 'gift with reservation'.

Thankfully, there is plenty of HMRC guidance to give comfort that DGTs are established and accepted practice. HMRC IHT manual confirms that provided the settlor's retained rights are clearly defined, there's no gift with reservation and they have also published guidance on how discounts should be calculated.

Flexible Reversionary Trusts
These schemes are similar to Discounted Gift Trusts in that there is a gift into trust and the settlor retains a right to future capital payments. The key difference is that the settlor can choose to either defer these payments or not take them at all. As a result there is no discount available on these schemes and the full amount paid in will be a gift for IHT.

Until now there hasn't been the same published guidance from HMRC on their acceptance of Flexible Reversionary Trusts. However, the HMRC IHT Manual has now been updated to reflect that there is no gift with reservation provided the settlor's rights are carved out separately from those which have been gifted.

Summary

Clients seeking clarity and certainty that the plans they have put in place to reduce their IHT liabilities need to stick with tried and tested mainstream solutions. New schemes offering bells and whistles are only likely to attract unwanted attention from HMRC.