Govt targets discretionary trusts in IHT clamp-down

The Government is proposing to extend tax anti-avoidance measures in a crack-down on the use of discretionary trusts to dodge inheritance tax (IHT).

In a joint paper launched today with HMRC, the Government suggests extending the Disclosure of Tax Avoidance Schemes (DOTAS) regime to include IHT as it applies to the transfer of property into trust.

The Government and HMRC say they are aware tax avoidance schemes are being used to avoid this IHT charge. However, while the Finance Act 2010 included legislation to close down two such arrangements, the full extent of activity in this area is not known.

Today's paper is marked as a "consultation", but the Government is only inviting comments on specific points related to implementation of its proposed measures.

The consultation closes on 20 October and new regulations in this area are expected to come into force in April 2011.

It is asking for responses on the types of schemes which would have to be notified and the administrative burden involved, if it decided to include discretionary trusts in the DOTAS regime.

The paper's proposals build on work done by the previous Government to target certain types of tax avoidance.

In the 2009 Pre-Budget Report, draft legislation was published closing down two IHT avoidance schemes using trusts.

These involved complex measures to avoid paying a creation charge of 20% for trustees or 25% for those gifting, for setting up a trust above the tax-free threshold of £325,000.

Tax officials have been working on applying DOTAS to certain aspects of IHT since January.