STEP welcomes the opportunity to respond to the consulation paper published on 20 April 2016.

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1 Response of STEP to Strengthening the tax avoidance disclosure regime for indirect taxes and inheritance tax consulation paper published on 20 April 2016 STEP is the worldwide professional association for those advising families across generations. We help people understand the issues families face in this area and promote best practice, professional integrity and education to our members. Today we have over 20,000 members across 95 countries, with over 7,000 members in the UK. Our membership is drawn from a range of professions, including lawyers, accountants and other specialists. Our members help families plan for their futures: from drafting a will or advising family businesses, to helping international families and protecting vulnerable family members. We take a leading role in explaining our members views and expertise to governments, tax authorities, regulators and the public. We work with governments and regulatory authorities to examine the likely impact of any proposed changes, providing technical advice and support and responding to consultations. STEP welcomes the opportunity to respond to the consulation paper published on 20 April Introduction 1.1 This is a response to the consultation document relating to strengthening the tax avoidance disclosure regimes for indirect taxes and inheritance tax published on 20 April Our response relates only to inheritance tax. 1.2 HMRC s original proposals for extending the application of the DOTAS regime in relation to inheritance tax were initially proposed in a consultation document published on 31 July A further consultation on initial draft regulations was published on 17 July STEP responded to both consultations. A copy of STEP s response to the 2015 consultation is attached as an appendix. 2 DOTAS general principles 2.1 When the DOTAS regime was introduced in 2004, its aim was to collect information about aggressive marketed tax avoidance schemes. The continuing reference to schemes in the consultation documents appears to indicate that this remains the policy. 2.2 The February 2016 summary of responses published by HMRC picks up on this in relation to inheritance tax specifically. Paragraph 1.6 confirms that the Government: T: +44 (0) F: +44 (0) E: step@step.org W:

2 remains committed to updating the IHT hallmark, but in a way that is tightly targeted and does not catch ordinary, non-abusive, tax planning. 2.3 This policy is apparent in the approach taken in relation to existing DOTAS hallmarks. The general hallmarks relating to confidentiality, premium fees and standardised documents are clearly aimed at marketed schemes. 2.4 Over time, it has become apparent that significant numbers of schemes have targeted particular areas and so hallmarks have been developed in relation to those specific areas for example, loss schemes, leasing arrangements, disguised remuneration and financial products. 2.5 In relation to inheritance tax, the same is true of the existing approach where the 2011 regulations target attempts to transfer assets to a relevant property trust without paying the upfront 20% inheritance tax charge. 3 DOTAS the proposed approach for inheritance tax 3.1 The approach taken for the other main taxes (income tax, capital gains tax and corporation tax) as outlined above is in sharp contrast to the approach which is now proposed for inheritance tax. 3.2 This proposal is that any arrangement which gives rise to an inheritance tax advantage will potentially be notifiable. The only filter is that there must be some element which is contrived or abnormal. 3.3 This is in substance a general anti-avoidance rule as far as notification is concerned and, at least on our understanding, goes way beyond the policy behind the DOTAS regime which is to require notification of arrangements which are abusive and is aimed principally at marketed tax avoidance schemes. 3.4 Due to the nature of inheritance tax, much inheritance tax planning could be described as contrived or abnormal given that it is never driven by commercial considerations. 3.5 The fact that it is deemed necessary to specifically carve out various insurance based planning arrangements such as loan trusts clearly demonstrates that HMRC consider that something as simple as making an interest free loan to a trust or a family member might be described as contrived or abnormal. Yet there would be no expectation amongst taxpayers that something as straightforward as this should have to be reported. T: +44 (0) F: +44 (0) E: step@step.org W:

3 3.6 Whilst the regulations could be supplemented by guidance setting out HMRC s view on what is intended to be caught and what need not be reported, such guidance is of limited value. For understandable reasons, the guidance is likely to be relatively conservative as HMRC will not want promoters to be able to justify non-disclosure of aggressive schemes based on the guidance. Guidance also tends to give examples which are clearly at one end of the spectrum or another, leaving significant uncertainty for all the arrangements which fall in the middle. 3.7 As a more general comment, having a very wide test in the regulations which is then narrowed by guidance is an unsatisfactory approach both for HMRC and for practitioners. The likely result will be a flood of notifications which will impose significant administrative burdens on both practitioners and HMRC and will dilute the effectiveness of the regulations as it will make it more difficult for HMRC to sift out those notifications which they are really interested in. 3.8 It should be remembered that, given the sanctions for non-compliance with the DOTAS regime, practitioners are likely to take a cautious approach and err on the side of notification where there is any uncertainty. 3.9 As explained in our previous consultation response (see Appendix A), we believe that taking an approach which is consistent with income tax, capital gains tax and corporation tax i.e. creating hallmarks targeted at specific areas of abuse will be more productive in providing HMRC with the information it is seeking and therefore in fulfilling the policy behind the DOTAS regime We would suggest that the hallmarks cover the following areas: transferring assets into trust without incurring the upfront 20% inheritance tax charge other than through the use of reliefs (i.e. the 2011 hallmark); avoiding or reducing relevant property trust ten year charges other than through the proper use of reliefs; arrangements designed to circumvent the reservation of benefits rules in circumstances where there is no pre-owned assets tax charge; arrangements involving the use of excluded property trusts where the individual obtaining the tax advantage has no prior connection with the settlor of the trust; T: +44 (0) F: +44 (0) E: step@step.org W:

4 schemes exploiting business property relief or agricultural property relief without the taxpayer suffering the economic consequences of holding such property; abuse of employee benefit trusts; arrangements which reduce the value of an individual s estate in circumstances where all or part of that reduction in value is not immediately taxable or would not be taxable if the individual were to die within seven years other than through the proper use of reliefs We understand that the hallmarks need to be drafted with sufficient certainty to be legally effective. We will write separately with some draft wording of hallmarks which will suggest an approach which could be considered. 4 Comments on the draft regulations 4.1 For the reasons set out in sections 2 and 3, we feel very strongly that the proposed approach will not provide the best results and is contrary to the policy behind the DOTAS regime. However, if it is decided to press ahead with regulations based on that approach, we make the following comments on the draft regulations. 4.2 As explained above, much standard inheritance tax planning could be described as contrived or abnormal. We therefore believe that there should be a further test before any notification requirement arises. Some possible alternatives for a new condition 3 (which would have to be satisfied in addition to conditions 1 and 2) include: the arrangements seek to achieve a result which is contrary to the clear intention of Parliament in enacting the inheritance tax legislation. This would, for example, catch an attempt to circumvent the GROB rules without being subject to pre-owned assets tax or to buy an interest in an excluded property trust which was not caught by the existing antiavoidance provisions; or the arrangements are abusive within the meaning of section 207 Finance Act 2013 (the general anti-abuse rule). T: +44 (0) F: +44 (0) E: step@step.org W:

5 4.3 The schedule to the regulations contains a number of insurance based arrangements which are excluded from any requirement for notification. This raises a number of issues: Why should insurance based arrangements be given special treatment? For example, why should a loan to a trust which is then invested in something other than an insurance bond be treated differently from a loan to a trust which is invested in an insurance bond? The clear implication is that the former would be notifiable which would seem a surprising result There is a risk that excluding insurance based arrangements might encourage mis-selling of these products to potentially vulnerable people (e.g. elderly clients) in inappropriate circumstances There is also a risk that it will encourage people to use insurance bonds as wrappers specifically for inheritance tax avoidance purposes. 4.4 If the approach proposed in the draft regulations is adopted, it would, in our view, be better for the regulations not to exclude any specific arrangements but for this to be dealt with by the anticipated guidance. We recognise that this is an unsatisfactory approach (which, as discussed above, is one of the reasons we would advocate a different approach to the regulations entirely) but it would hopefully enable HMRC to identify in a more comprehensive way those arrangements which are acceptable and those which may need to be notified. Submitted by STEP UK Technical Committee on 13 July 2016 Appendix A annexed T: +44 (0) F: +44 (0) E: step@step.org W:

6 STEP response to the HMRC consultation on the draft regulations regarding the extension of DOTAS to IHT, published 17 July 2015 Introduction STEP is the worldwide professional association for those advising families across generations. STEP promotes best practice, professional integrity and education to its members, and helps people to understand the issues families face in securing their financial future. Today STEP has 20,000 members worldwide (7,000 in the UK alone), from a range of professions, including lawyers, accountants and other specialists that help families plan for their futures: from drafting a will or advising family businesses, to helping international families and protecting vulnerable family members. Consultation response STEP believes that a fair tax system must include effective measures to counteract abuse and recognises that a small number of firms and individuals have an unacceptable approach to the promotion of abusive avoidance schemes. However, STEP has significant concerns regarding the current draft regulations in relation to IHT and the potentially serious consequences that they could have for ordinary people who simply want to provide for their family's security using the tax reliefs and exemptions set out in the legislation. It is very important that the interests of the vast majority are not prejudiced by the regime. Although we understand that it is not possible to foresee all the types of scheme which may be used in future, it should be possible for HMRC to identify broadly the types of arrangements they are likely to find abusive and to target the DOTAS regime at those. It is important that the DOTAS regime is not extended in a way that would require mainstream benign and inoffensive estate planning arrangements that seek to do no more than use available reliefs and exemptions in a straightforward manner to be reported. The consultation document "Strengthening the Tax Avoidance Disclosure Regimes" published on 31 July 2014 stated that any new disclosure requirements applicable to T: +44 (0) F: +44 (0) E: step@step.org W:

7 IHT would remain tightly targeted, describe the avoidance that HMRC is interested in and not catch planning which involves the straightforward use of reliefs and exemptions. We do not consider that the draft Inheritance Tax Avoidance (Prescribed Descriptions of Arrangements) Regulations ('the IHT Regulations') published on 16 July 2015 achieve this. We consider that conditions 1 and 2 of Regulation 2 of the IHT Regulations as currently drafted, will almost invariably be satisfied by any IHT planning including planning of the most straightforward type. If this was not the case then there would be no need to include in Regulation 3 a specific exemption for the making and amending of a will or codicil. Due to the very wide scope of regulation 2, many STEP members who are high street practitioners and whose clients are not particularly wealthy and do not have particularly complex affairs will need to consider whether they need to report even straightforward estate planning. A lot of IHT planning advice is given by lawyers in the course of giving legal advice (and therefore subject to legal professional privilege) and the burden will therefore fall upon accountants and other professionals who do not enjoy full privilege, as well as on the clients themselves to report. A different approach In our view, HMRC were right in seeking to ensure that any disclosure requirements applicable to IHT should remain tightly targeted and describe the avoidance which HMRC is interested in so that they do not catch normal tax planning which individuals may undertake using the IHT legislation and its reliefs and exemptions in a way which would have been intended and expected by Parliament. Indeed, it is unlikely to serve HMRC s purposes if these sorts of transactions have to be notified as HMRC will be overwhelmed with disclosures of information which do not tell them anything new. It should be remembered in this context (as is stated in the 2014 consultation paper) that the purpose of the disclosure regime is to give HMRC early information about 'tax T: +44 (0) F: +44 (0) E: step@step.org W:

8 avoidance schemes' and their users, in particular, schemes which are ' new and innovative'. The rules are not therefore designed to catch every sort of tax planning which a taxpayer may decide to undertake and so the mere fact that a taxpayer does something which leads to a tax advantage should not be the starting point for a disclosure. Instead, we think that a much better way of achieving the policy objective and one which would be more consistent with how the rules work in relation to other taxes, would be to describe the sort of tax schemes which need to be disclosed rather than to introduce a hallmark which catches everything and then makes certain (slightly random) exemptions. One way in which this could be achieved would be as follows: (1) Extend the confidentiality and premium fee hallmarks in paragraphs 6-9 of the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 to IHT. (2) Consideration could also be given to extending the standardised tax product hallmark in paragraph 10 of those regulations to IHT but it would be necessary to consider whether certain sorts of arrangements should be excluded in paragraph 11 of those regulations. Exclusions might include, for example, wills and trusts based on standard form precedents. (3) Introduce new descriptions dealing with specific categories of IHT avoidance which HMRC feel should be caught. This might, for example, cover: (3.1) as is currently the case schemes which enable assets to be held in a relevant property trust without an entry charge; (3.2) schemes designed to avoid or reduce relevant property trust ten year charges other than through the proper use of reliefs; (3.3) schemes which involve having the enjoyment or benefit of an asset which is not part of an individual s estate in circumstances where the reservation of benefit rules/poat rules do not apply; T: +44 (0) F: +44 (0) E: step@step.org W:

9 (3.4) schemes exploiting business property relief or agricultural property relief without the taxpayer suffering the economic consequences of holding such property; (3.5) use of employee benefit trusts; and (3.6) schemes which reduce the value of an individual s estate in circumstances where all or part of that reduction in value is not immediately taxable or would not be taxable if the individual were to die within seven years other than through the proper use of reliefs. This should in our view still ensure that HMRC receive the information which they wish to obtain whilst at the same time excluding straightforward IHT planning from the scope of the rules. Draft regulations Should the decision be taken to continue with an approach based on the draft regulations, we would make the following comments: Regulation 2(2) condition 1 Condition 1 is far too wide as it refers to the main purpose or one of the main purposes of the arrangements being that a person might reasonably be expected to obtain advantage in relation to IHT. The condition does not contain any reference to IHT avoidance or the abusive nature of arrangements. We do not believe that it is the aim to catch the straightforward use of tax relief and exemptions in the way in which Parliament intended those should be used. Even taxpayers who would never consider entering into a tax avoidance scheme, will want to ensure that they provide for their family in a tax efficient way, in order to pass on the maximum value permissible. In structuring their affairs individuals who are advised will usually want to obtain any tax advantage which is allowed under the IHT legislation. However, there will be many situations where the tax advantage is only incidental to the passing on of wealth to family members. The making of gifts whether T: +44 (0) F: +44 (0) E: step@step.org W:

10 during lifetime or on death is not a commercial transaction and the considerations that apply are different. The use of the words 'might reasonably be expected' does not sit well with 'main purpose'. Purpose is a subjective concept, whereas 'might reasonably be expected' is objective. Individuals do not always seek professional advice about the IHT consequences of making gifts or organising their assets. The interaction of conditions 1 and 2 would mean that those who have not taken tax advice may not be caught whereas those who have taken such advice may be. We feel that it is inappropriate to create a regime which may deter individuals from seeking professional tax advice (or alternatively favour one class of professionals over another). Given the complexity of IHT and the gifts with reservations and pre-owned assets rules this should not be encouraged. Regulation 2(3) condition 2 Condition 2 is far too wide and would seem could be satisfied when carrying out straightforward planning using statutory reliefs such as: making of lifetime gifts rather than gifts by will in order to benefit from the exemption after 7 years under the potentially exempt transfer rules, gifting assets qualifying from business property relief or agricultural property relief (rather than other assets) to younger members of the family during lifetime rather than on death, gifting assets qualifying from business property relief or agricultural property relief (rather than other assets) to a trust for the benefit of younger members of the family, creation of a trust every 7 years in order to maximise the availability of the nil rate band, giving assets to a younger spouse or civil partner who may have a longer life expectancy, T: +44 (0) F: +44 (0) E: step@step.org W:

11 trustees of relevant property trust investing in assets qualifying for business property relief or agricultural property relief which will result in a reduction of the charge at the 10-year anniversary, giving away a house to a family member and paying market rent to continue in occupation, giving away a share of a house and co-occupying with the donee, using a deed of variation to increase the amount passing to charity under a will so as to benefit from the reduced rate of IHT, use of surplus income to pay school fees for grandchildren rather than increasing the value of your estate, trustees of a relevant property regime settlement distributing income just before the deadline to avoid deemed accumulation, creating a settlement with assets which have a high growth potential whilst they have a low value. We consider that condition 2 should be deleted. Regulation 3(2) Given the wide scope of the provisions in regulation 2, the list of excepted arrangements needs to be much more comprehensive. It is important that the exceptions are clear and set out in the legislation rather than guidance. Even in relation to the making or amending of wills it would seem that the exception may not apply if, for example, the individual created a lifetime trust with a small initial trust fund and then provided that it be funded under the terms of his will on death. Regulation 3(3) It is disappointing that whilst this type of insurance planning arrangement has been specifically mentioned, there is no list of other more common types of standard IHT planning which are to be excepted. Regulation 3(4) T: +44 (0) F: +44 (0) E: step@step.org W:

12 The provision is unclear in that it would allow an individual to make a large transfer into trust and for the arrangement to be excepted as long a small interest free loan was made to the trust. Again this seems to be targeted at a particular insurance scheme but there seems no justification for either restricting this to interest free repayable on demand loans or for restricting it to loan trusts and not loans to other vehicles. The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) (Amendment) Regulations 2015 Given the scope of the IHT Regulations we cannot see why, if it is intended to continue with the existing approach, it is considered necessary to apply the confidentiality and premium fee hallmarks to IHT. Either the generic hallmarks should be extended to IHT with some specific prescribed descriptions (our preferred approach) or IHT should be covered by a separate hallmark but we do not believe that it is necessary to have both approaches applied to IHT. STEP UK Technical Committee 14 September 2015 T: +44 (0) F: +44 (0) E: step@step.org W: