Tax Experts Urge Wider Review Of UK Inheritance Tax

by Robin Pilgrim, LawAndTax-News.com, London

27 October 2010

The Chartered Institute of Taxation (CIOT) has criticized the government's latest effort to crack down on inheritance tax avoidance, suggesting that a wider examination of the policy objects of the tax is needed rather than piecemeal anti-avoidance rules.

"We suggest that a review of the overall policy of inheritance tax (IHT) and what it is trying to achieve would be a better way of dealing with perceived tax avoidance than imposing yet another layer of anti-avoidance legislation in the form of these disclosure requirements," the CIOT said in its recently releases response to the consultation document 'Disclosure of Inheritance Tax avoidance' issued by HM Revenue & Customs (HMRC) in July.

"Indeed, in the current financial climate, we would suggest that introducing a disclosure regime based on transfers into trust rather than avoidance of IHT per se is not a sensible use of HMRC's resources. Despite these fundamental reservations, we consider that, if our recommendations are heeded, the proposals would be workable, on a purely technical level," the CIOT commented,

Following consultation, the March 2010 budget announced a package of five measures to strengthen and improve the Disclosure of Tax Avoidance Schemes (DOTAS) regime. Briefly these measures are:

• A new 'trigger point ' for the disclosure of actively marketed schemes – the point at which a promoter first communicates information (including information about the expected tax advantage) about a substantially designed scheme to a third party with a view to obtaining clients for that scheme;
• An information power which gives HMRC the power to require a scheme 'introducer' (an intermediary whose function is to introduce clients to the promoter) to identify the promoter;
• Increased penalties for failure to comply with a disclosure obligation;
• A new requirement for promoters to provide HMRC with periodic information about clients who implement a notifiable scheme; and
• Revised and extended 'hallmarks' (descriptions of schemes requiring disclosure).

"We have yet to be convinced that there is widespread avoidance of the IHT charge that arises when property is transferred into trust or, if there is, that it is in truth avoidance. The gift into trust provisions should be subjected to a policy review before the imposition of DOTAS system can be justified," the CIOT's submission notes, before going on to observe:

"If there is so-called avoidance it has been largely caused by the introduction of a misguided policy in 2006: namely, that lifetime gifts into trust should be more severely taxed than gifts to individuals. There is no sensible policy reason for this. It is perfectly legitimate for people to wish to protect their issue from receiving money at too young an age."

"The present IHT policy favours those with adult and fully capable children and discriminates against those who wish to provide for vulnerable issue or minors, by imposing a wholly arbitrary 20% entry charge on gifts into trust. Creating a level playing field between those who wish to provide for their issue in trust and those who wish to make outright gifts would largely deal with the so-called IHT avoidance that the disclosure rules attempt to address. We would therefore urge the government to review this policy rather than introduce a disclosure rule that does not deal with the real problem."

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