As consultation begins on including trust-based IHT schemes in the Disclosure of Tax Avoidance Schemes regime, adviser Sheriar Bradbury (pictured) emphasises the caution with which IFAs must approach tax planning schemes for clients.
Advisers’ inheritance tax (IHT) arrangements for clients will come under greater scrutiny from HM Revenue & Customs (HMRC) following government plans to clamp down on those using IHT structures to avoid tax.
The government launched a consultation last week on bringing trust-based IHT schemes under the Disclosure of Tax Avoidance Schemes (Dotas) regime.
Dotas, which began in 2004, obliges promoters – typically accountants and lawyers – to report tax planning arrangements that, although legal, create results that differ from what HMRC would expect.
‘It suggests there could be seemingly straightforward things technically falling within the disclosure regime,’ said Alex Henderson, tax partner at PricewaterhouseCoopers.
‘It could include discounted gift trusts or something more complex, for example, for a client who is divorced and needs to set up single funding and equal provision for two people.’
The new rules specifically do not apply to insurance-based schemes or arrangements that are already established as good practice.
Although the days of marketed schemes are over, says Henderson, there are still common practices that HMRC frowns on.
‘For example, if a client wishes to keep some information confidential. Another example is arrangements where the tax planner doesn’t get paid if the arrangement doesn’t work and [receives] a large fee if it does.’
Previously HMRC had to wait until an individual died to find out if they had a new or innovative IHT arrangement. Including the tax in Dotas could speed up the process.
Sheriar Bradbury, director of London-based Bradbury Hamilton, says he is extremely cautious when recommending tax planning schemes to clients.
‘We use discounted gift schemes and loan trusts. If it’s highly complex, we would look for specialist advice. But normally, if it is not already tried and tested, we view it as too risky for our business from a reputational point of view,’ he says
‘If clients want something more complex, they would have to go to an accountant or lawyer. But it is very dangerous to recommend somebody. You can be caught by HMRC for being an agent if it turns out there’s substantial tax loss to the revenue.’
Dotas is unlikely to affect IFAs performing straightforward tax planning, but planners will have to understand the difference between the conventional schemes and more aggressive arrangements, and would be expected to know what tax arrangements their client has been put in by others.