The government’s recently unveiled draft legislation on the disclosure of tax avoidance schemes could catch legitimate inheritance tax planning, which chartered tax adviser Eamonn Daly, a partner at Lodders Solicitors, says would be a U-turn on previous assurances.
“When HMRC was originally consulting on this last year, it was at pains to stress that traditional tax planning and use of reliefs and exemptions would be unaffected,” says Eamonn.
At the time the shake-up of the disclosure of tax avoidance schemes (DOTAS) rules were proposed, HMRC claimed its objectives would be to crack down on previously undetected inheritance tax planning schemes where it suspected substantial sums were at risk.
“HMRC said it was determined to close the loopholes,” says Eamonn, “and that any changes would be confined to ensuring a greater flow of information about the use of tax avoidance arrangements.
“Many professionals were fearful when the anti-avoidance legislation was first proposed that it would end up being drafted so widely that it would catch innocent transactions. But HMRC reassured that traditional tax planning would be unaffected, and even insisted that the intended crackdown would specifically target very artificial schemes.
“Post consultation the draft legislation* provides quite the opposite. It is in fact so widely drafted that it could cover basic acceptable steps, including in theory, something as simple as a gift to children.
“The measures outlined in the draft indicate that an arrangement will be reportable under DOTAS if its main purpose, or one of its main purposes, is to obtain an IHT advantage, and if it is contrived or abnormal, or unlikely to have been made if there were no tax advantage.
“It is the last condition and the reference to tax advantage rather than tax avoidance, which seems broad enough to catch straightforward planning.
“This is particularly controversial because any method of tax planning that is ‘DOTAS hallmarked’ now makes the user liable to receive an accelerated payment notice, forcing payment in advance of a sum HMRC considers to be the tax due with no appeal possible.
“In practice HMRC is not going to want to be swamped with disclosures of non-controversial planning and the draft legislation may well be ameliorated before it becomes law, or afterwards by guidance providing exceptions from the new rules.
“This would follow the unsatisfactory trend of wide-ranging taxation legislation being added to the statute book and easily changeable HMRC guidance giving it a narrower focus later being provided, sometimes months after the law is in force.
“Professional advice from reputable advisers with up-to-date knowledge of the maze of tax law and practice is the only way to really be sure of effective and efficient inheritance tax planning,” says Eamonn.