Inheritance tax and trusts - tightening the screw

For many years the Inland Revenue (now Her Majesty's Revenue and Customs "HMRC") has been handicapped in carrying out its role as collector of taxes, as it simply has not been aware of many transactions made across the country on which a liability to pay tax arises. As HMRC has not been aware of the transactions, those accountable have avoided payment of the tax due.

The situation changed to some extent in 2004 with the Disclosure of Tax Avoidance Schemes ("DOTAS") regime. Under DOTAS there has been an obligation to notify HMRC of many arrangements which result in a tax liability - but this has not included inheritance tax schemes. 

On Monday 6 December 2010 the Exchequer Secretary to the Treasury, David Gauke, announced in a Written Ministerial Statement on 'Anti-Avoidance' that it will extend the regime. Following a Consultation Paper and the Summary of Responses published by HMRC, the Treasury has now announced that from 6 April 2011 inheritance tax will also be subject to the DOTAS regime.  As a result, in order to prevent those setting up trusts avoiding payment of the 20% inheritance tax due when money and property are transferred into a trust, from 6 April 2011 it will be obligatory to inform HMRC about the transfer. This disclosure must be made within twelve months of the end of the month in which the transaction is first entered into.

As it may be difficult to ascertain whether the few exceptions to the duty to disclose will apply in specific circumstances, HMRC will publish a list of schemes and arrangements already known to it. In order to allow the notification system to work as efficiently as possible, these will now need to be disclosed.

It is likely that the practical burden of notification will fall on solicitors and accountants advising on the trust. Although the penalties for failure to do so have not yet been outlined, it is likely that they will be substantial given the purpose of the regulations. Advisors must therefore be aware of the duty and to advise their clients accordingly. Failure to advise clients sufficiently is likely to be negligent.  Advisers may also wish to consider whether there is merit in an individual setting up a trust before 6 April 2011.

Ashfords' Trusts and Estates Team can assist on any questions you may have regarding the creation or use of a trust.  For taxation and estate planning advice, please contact Michael Alden on 01392 334041. In the unfortunate event of a dispute in relation to a trust or a deceased person's estate, contact Robert Horsey on 01884 203086.