IHT: Anti-avoidance

Question 1

What is tax avoidance?

Answer 1

An agressive form of tax planning that involves taking complex and artificial steps to achieve tax advantage.
* where HMRC becomes aware of this, anti-avoidance legislation may be introduced to prevent further exploitation

Question 2

What is the purpose and effect of gifts with reservation of benefit (GROB)?

Answer 2

• To prevent individuals obtaining IHT advantage from giving away property during their lifetime then continuing to benefit from it after gift is made
• Effect is that gift is treated as never leaving IHT estate of donor and so gifted asset is taxed upon donor’s death irrespective of how long ago gift was made.

Question 3

When do GROB rules apply?

Answer 3

• if donee does not assume bond fide possession of property at or before start of relevant period (7 year period before donor dies):
  
  • vested, beneficial interest in property
  • actual enjoyment of property (e.g. living there or receiving rent) and
  • assumed possession and enjoyment by start of relevant period
• at any time during relevant period, property is not enjoyed to entire exclusion of the donor:
  
  • donor returning for social visits or occassional overnight stays = rules do not apply

Question 4

Effect of reserved benefit?

Answer 4

• if reserved benefit subsists on date of donor’s death, it forms part of IHT estate and valued on date of death not date of gift
• if reserved benefit is given up before they die, donor is deemed as making PET on date of reservation of benefit ceased and is valued on that date - if deemed PET occurs within 7 years of donor’s death, IHT is charged but no annual exemption as there is no transfer

Question 5

What is a pre-owned assets charged?

Answer 5

To address HMRC concerns regarding:
* taxpayer using aggressive IHT avoidance schemes to prevent application of GROB rules
* GROB rules do not trace into assets acquired using gifted cash as donor did not retain benefit in gifted asset itself.

= POAC would only apply if an asset was not otherwise taxed as GROB but if arrangement falls within both, GROB rules take priority.

Question 6

When does POAC apply to land & chattels?

Answer 6

• where an individual must individually or with others occupy land or use or possesion of a chattel
• individual must have either previously disposed of land or chattel or contributed directly or indirectly to the acquisition of land or chattel without obtaining beneficial interest (e.g., providing cash with was used towards purchase of an asset)

= when POAC applies, it’s an annual income tax charge and amount of charge is determined by quantifying value of benefit received by individual and taxing amount as income

Question 7

When does POAC not apply?

Answer 7

• to property included in individual’s IHT estate
• if annual charge would be within limit of £5000
• to some gifts that qualify for relief from IHT
• where donor contributes towards acquisition of asset more than 7 years before occupation/possession starts

Question 8

When POAC is payble, what can a taxpayer elect for?

Answer 8

• Can elect for originial gift to be taxed as though it was a GROB for IHT purposes instead of paying income tax charge.

Question 9

What are the restriction on deduction of loans?

Answer 9

For anti-avoidance rules, they prevent or restrict deduction of certain debts such as:
* loans taken out to fund acquisition, maintenance or enhancement of assets that either qualify for relief (BPR/APR) or excluded from estate
* any loans which is not repaid

Question 10

Loans made for assets attracting BPR/APR

Answer 10

• if deceased borrowed money to acquire, maintain or enhance assets that qualify for BPR or APR, value of qualifying assets is notionally reduced by amount of outstanding loan before amount of BPR/APR is determined
• e.g., man’s taxable estate includes shares of 100,000 which qualify for 100% BPR but borrowed money to buy shares and 25,000 remains
• laon can be deducted in normal way but anti-avoidance rules restrict amount of BPR available to 75,000

Question 11

Unpaid loan?

Answer 11

• debts can only be deducted from value of estate at death if loan is repaid
• debts deceased owed to member of their family or trusts, HMRC will need to check if they are repaid and non written off.

Question 12

Anti-avoidance rules on settlor-interested trusts?

Answer 12

Settlor-interested trusts is one where trust property will or may be payable to or for benefit of settlor or their spouse and/or minor children.
Rules are:
* **IHT: **settlor creates a trust from which they can benefit is taxed as a GROB - even if settlor is only a potential beneficiary and whether or not they recieve benefit but no GROB if settlor’s spouse or minor children beneift
* Income tax: if settlor, spouse or minor child benefit, trust income can be taxed as though it belongs to settlor
* CGT: if settlor, spouse or minor child benefit from trust, hold-over relief will be available for settlor when transferring assets to trust

Question 13

What is the Disclosure of Tax Avoidance Scheme (DOTAS)?

Answer 13

• legal advisers can be required to tell HRMC the details of tax avoidance schemes they offer to client and HMRC may take measures to limit effectiveness of these arrangements
• for IHT, disclosure is required where a person obtaines an advantage in respect of charges relating to value of person’s death estate, GROB rules and trusts
• ordinary IHT planning is acceptable and need not be notified to DOTAS.

Question 14

What is the General Anti-Abuse Rule (GAAR)

Answer 14

Enacted to prevent effectiveness of aggressive tax avoidance schemes which are deemed contrary to spirit of law, designed to exploit loopholes
For GAAR to apply:
* taxpayer enters an arrangement which results in tax advantage - HMRC compares outcome received on paper with outcome that was most likely in abscene of arrangement
* obtaining tax advantage is main purpose of arrangement
* arrangement is abusive must be shown by HRMC that arrangement could not reasonably be regarded as a reasonable course of action (double reasonableness test)

= taxpayer caught by GAAR can be required to make reasonable adjustments to their arrangements and pay financial penalty