Tax Planning and Anti-Avoidance

Question 1

What is tax avoidance?

Answer 1

It is the efficient and lawful and arrangement of a client’s affair in a manner which minimises their liability to tax

Question 2

What is aggressive tax avoidance?

Answer 2

A form of tax avoidance which involves the taxpayer entering complex or artificial arrangements which have the overall effect of reducing their tax liability. Schemes comply with legislation but not intention of law. HMRC often introduces new legislation to prevent them

Question 3

What is tax evasion?

Answer 3

Where taxpayer withholds information about assets or income, or otherwise takes steps to avoid paying the tax they are liable for.

Question 4

What is the objective of IHT planning?

Answer 4

To reduce the overall IHT liability on a person’s estate

Question 5

What could clients choose to do in relation to business and agricultural property relief?

Answer 5

Clients could choose to invest in assets that qualify for BPR/APR

Question 6

Why would it be advisable for clients to invest in life insurance policies/pensions that are written in trust?

Answer 6

These assets will not be subject to IHT

Question 7

How can a client mitigate the risk of IHT being due on a PET if it fails?

Answer 7

Can take out fixed term life assurance for 7 years for value of IHT in case the PET fails

Life assurance policy should be written in trusts

Question 8

If clients are making PETs to lower IHT burden, why is it better to give way assets that are likely to rise in value?

Answer 8

As PET value is taken at time of transfer not death so will be lower

Question 9

What can be done to minimise the any CGT due on a PET?

Answer 9

Do transfers over multiple years to benefit from CGT annual exemptions

Question 10

What is the parental settlement rule?

Answer 10

When transfer is made to unmarried minor, for income tax purposes, the income arising from the property given away (if more than £100) is still treated as belonging to the parents

Question 11

What is the benefit of making lifetime transfers?

Answer 11

Nil rate band resets every 7 years so can keep taking advantage of it

Question 12

Who are exempt beneficiaries for income tax purposes?

Answer 12

Charities and spouses

Question 13

What are exempt assets from IHT?

Answer 13

Business property and agricultural property

Question 14

What should be done in relation to exempt beneficiaries and exempt assets in relation to tax planning?

Answer 14

Exempt assets should be given where possible to non-exempt beneficiaries

Exempt beneficiaries should benefit from assets that would otherwise incur an IHT charge

Therefore making the most of both exemptions

Question 15

Why should qualifying assets be made as specific legacies rather than in the residue?

Answer 15

The relief will attach to the asset making it exempt from IHT if a specific gift

In residue, relief does not attach to asset but apportioned generally between the taxable and non-taxable beneficiaries.

Question 16

What happens if all specific gifts are given tax free and the residue is given to an exempt beneficiary? Who bears the burden of tax?

Answer 16

The residue - only place the tax can come from

Question 17

What is the best way to form a clause that makes use of nil rate band by way of gift to non-exempt beneficiary?

Answer 17

Draft it in terms of a formula ie ‘gift equal to value of my nil rate band’ as then accounts for any increases in the nil rate band and maximises amount

Question 18

Why might a discretionary trust created by Will still be useful for tax planning purposes even though it will give rise potentially to iHT at time of testator’s death?

Answer 18

When a beneficiary dies, their taxable estate does not include the trust assets at the time

Question 19

Why are 2 year discretionary trusts common?

Answer 19

As for IHT purposes the distributions within that time period are taken to be made under the deceased’s will rather than by the trustees

Question 20

When will spousal exemption apply to life interest trusts?

Answer 20

When spouse is life tenant of trust

Not when spouse is remainder man

Question 21

Why are the anti-avoidance rules for IHT in relation to loans?

Answer 21

Because the financing costs of loans are deductible when ascertaining taxable value of a lifetime transfer

Question 22

What loans are subject to anti-avoidance rules?

Answer 22

• loans made to acquire, maintain or enhance assets that qualify for BPR/APR or woodlands relief
• loans which are not repaid from the estate
• loans made to acquire, maintain or enhance excluded property
• loans which fund a qualifying foreign currency account

Question 23

What is the anti-avoidance rule in relation to assets attracting BPR/APR/Woodlands relief?

Answer 23

The costs of the loan must first be set against the value of the qualifying assets,. This reduces the value of assets which attract relief.

If loan exceeds value of the relievable assets the remainder can be deducted from value of the chargeable estate

Question 24

What is the effect of the anti-avoidance rule for loans that are not repaid from the estate?

Answer 24

The loan cannot be deducted from value of estate so forms part of the value of estate for IHT purposes

Question 25

What is the effect of the rule for gifts with reservation of benefit?

Answer 25

The property gifted is deemed for IHT purposes to still form party of the donor’s estate so is taxable on death if they still receive benefit

If stopped retaining benefit within 7 years prior to death, then treated as if a failed PET

Question 26

When will a lifetime gift be treated as a GROB?

Answer 26

• where the donee does not assume ‘bona fide possession’ of the property at or before the start of the relevant period
• at any time during the relevant period the property is not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor and of any benefit to him by contract or otherwise

The relevant period is the seven year period before the donor’s death

Question 27

What is bona fide possession for GROB?

Answer 27

Donee must

• obtain a vested, beneficial interest in the property
• have actual enjoyment of the property (physical or receipt of rent)
• assume possession and enjoyment of the property

Question 28

What is exclusion of donor for GROB?

Answer 28

No clear statutory definition but donor cannot continue to live full-time, rent-free at the property

Question 29

What is the pre-owned assets charge?

Answer 29

Annual income tax charge imposed upon individuals who give away certain types of property during their lifetime but subsequently obtain a benefit from that property

Question 30

What is the interaction between the pre-owned assets charge and GROB rules?

Answer 30

Property cannot be taxed under both.

Possible to elect to be taxed as GROB instead of POAC

Question 31

When property does POAC potentially apply to?

Answer 31

Applies to land, chattels and intangible property held in a settlor-interested trust.

Question 32

When does POAC apply to land?

Answer 32

Applies where:

• individual occupies land
• either disposal condition or contribution condition is met

Individual will then pay income tax on the equivalent of the market rent they would have had to pay in oder to occupy the land

Question 33

When does POAC apply to chattels?

Answer 33

Where individual has possession or use of property

De minimis rule applies here

Tax to the market value of the chattel and multiplying it by an official rate of interest

Question 34

When does POAC apply to settlor-interested trusts?

Answer 34

Applies where

• settlor will or pay become beneficiary of trust
• trust property must include intangible property which was settled into trust by settlor after 17 March 1986

Tax calculate by reference to the official interest rate that would be payable on settled property

Question 35

What transactions are specifically excluded from POAC?

Answer 35

• transfers to spouses
• transfers for family maintenance
• annual and small gift exemptions
• arm’s length sales
• occupation seven years after cash gift

Question 36

What is the general anti-abuse rule?

Answer 36

Rule which intends to catch arrangements which are contrary to the spirit or policy of tax law, seek to exploit perceived loopholes in the law or involve artificial arrangements aimed at avoiding tax

Question 37

What happens if taxpayer is found to have breached the general anti-abuse rule?

Answer 37

They are required to counteract the abusive effect of the arrangement by making ‘just and reasonable’ adjustments

Penalty also payable

Question 38

When will GAAR apply?

Answer 38

• arrangement gives rise to tax advantage ie reduction, deferral or avoidance
• tax advantages relates to tax which GAAR applies eg IHT
• arrangement satisfies the ‘main purpose’ test - reasonable in all the circumstances to conclude that obtaining a tax advantage is the main or one of the main purposes of the arrangement
• the arrangement is abusive - ‘cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances’

Question 39

What is the disclosure of tax avoidance scheme?

Answer 39

Scheme whereby promoters of arrangements must inform HMRC about notifiable arrangements or proposals.

HMRC then may impose further notifying requirements and penalties

Question 40

What is a notifiable arrangement under the disclosure of tax avoidance scheme?

Answer 40

• arrangements fall within any description prescribed by HM Treasury by regulations
• arrangements enable any person to obtain an advantage for a tax to which a relevant hallmark applies
• the arrangements are such that the main benefit or one of the main benefits is obtaining an identified advantage

Question 41

What is the IHT hallmark for purpose of disclosure of tax avoidance scheme?

Answer 41

The main purpose or one of the main purposes of the arrangements is to enable a person to obtain one or more specific advantages in respect of IHT. Specific advantages being:

• the avoidance or reduction of specified IHT charges relating to trusts and gifts to close companies
• the avoidance or reduction of charges relating to trusts and gifts to close companies
• a reduction in the value of an individual’s estate which does not give rise to a chargeable transfer or PET

The arrangements involve one or more contrived or abnormal steps without which there would no tax advantage

Question 42

What would have to be notified to HMRC under disclosure of tax avoidance scheme?

Answer 42

• creation of a reversionary lease to the lessor’s children which starts so far in the future that the lessor would not still be expected to be alive
• creation of an employee benefit trust to benefit the settlor’s children after the settlor’s death
• settlement of shares qualifying for BPR with an arrangement to sell them back to the settlor