To disclose or not disclose, that is the question?

DOTAS was first introduced in 2004 for income tax, corporation tax and capital gains tax.  This has since been extended to include national insurance, stamp duty land tax and more recently IHT.  The objective of the disclosure rules are to allow HMRC to obtain information about the tax arrangements, how they work and who uses them.  HMRC can use this information to consider the impact of the schemes, and where they consider it appropriate, introduce targeted anti-avoidance legislation.

The DOTAS regime requires specified persons to provide information to HMRC about tax schemes falling within certain descriptions.  The person required to make the disclosure is normally the promoter of the scheme such as a financial institution, bank, accountancy or law firm and applies to UK and non-UK based promoters.

The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations (SI2011/170) (‘the Regulations’) came into effect from 6 April 2011.  The Regulations impose an obligation for an IHT scheme to be disclosed where:

• the transfer of the property results in it, whether immediately or in the future, becoming relevant property;

By definition, this specifically excludes gifts into an absolute trust, charitable trusts, a qualifying interest in possession and a disabled person’s trust. Where arrangements do not, at any stage, lead to property becoming relevant property then the scheme will not have to be disclosed.

• an advantage is obtained in relation to a relevant property initial charge;

The word ‘advantage’ in this context means the avoidance, reduction, relief from or deferral of the relevant property initial charge to IHT.  This charge arises on a transfer of value made by an individual during that individual’s life as a result of which property become relevant property.

• the tax advantage is the main benefit of the arrangement; and
• the scheme does not fall within the grandfathering provisions.

A promoter is required to disclose the same scheme only once. Where minor changes are made to the scheme for example, to suit the requirements of different clients, the scheme will not have to be separately disclosed providing the revised proposal remains substantially the same.

The Regulations apply to new arrangements.  They do not apply to arrangements which are the same or substantially the same as arrangements;

• which were first made available for implementation before 6th April 2011;
• in relation to which the date of the transaction forming part of the arrangements falls before 6th April 2011; or
• in relation to which a promoter first made a firm approach to another person before 6th April 2011.

What constitutes a change in a scheme or arrangement so that it is no longer substantially the same is a matter which will need to be considered on each occasion.  HMRC have provided some guidance on this point.  In general, provided the tax analysis is substantially the same, HMRC will regard the scheme as substantially the same.  If the change is a no more than a different client, including a different company within the same Group offering the same scheme, then this will not require disclosure.  This is not exhaustive and HMRC re-iterate within the Regulations that if any promoter is in doubt as to whether the scheme should be disclosed then disclosure should be made.

HMRC have provided a list of schemes which they regard as being grandfathered, the list is illustrative only.  Some of the schemes they have listed include, but are not limited to:

• Discounted Gift Trusts
• Loan Trusts
• Insurance policy trusts
• Transfers of the nil-rate band every seven years
• Pension death benefits, where the scheme member retains the retirement benefits but the pension scheme death benefits are transferred to a relevant property trust.  However, if the transfer is part of an arrangement which enables an advantage to be obtained in respect of the relevant property initial charge then it will need to be disclosed.
• Changes in the distribution of a deceased’s estate such as a deed of variation, disclaimer or an election by a surviving spouse or civil partner under s47A of the Administration of Estates Act 1925.
• Reversionary interest trusts
• A chargeable transfer followed by a potentially exempt transfer

All of Skandia Internationals trusts fall within the grandfathering provisions.  However, if any scheme does not fall within the grandfathering provisions or if there is any doubt as to whether a scheme should be disclosed then it would be prudent to make the disclosure to HMRC who will advise the promoter accordingly.