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Estate planning during coronavirus - Part II

Technical article

Publication date:

07 May 2020

Last updated:

12 May 2020


Barbara Gardener

Here we delve further into estate planning during the time of the coronavirus outbreak in part II. 

The subject of IHT reform has unexpectedly raised its head again, albeit in a completely different context compared to the pre-March Budget speculation.

Many economics experts predict; indeed many believe it is inevitable, that the government will need to introduce drastic tax increases to pay for the massive public spending (borrowing) needed for the rescue measures introduced because of the coronavirus crisis. In anticipation of this it may well be a good time to prepare for possible taxation reforms that might be pushed through in an emergency Budget.

The previously mooted reforms to IHT and CGT, namely  a reduction in or the abolition of business and agricultural property reliefs (here referred to as BPR and APR) , abolition of  the tax-free capital gains tax uplift on death and of the seven-year rule for potentially exempt transfers certainly appear to be an easier (and perhaps more palatable to the majority of citizens)  way to raise taxes than a general increase in the income tax rates (something that no Conservative government would normally contemplate except we are not living in normal times). However, we have also seen the recent demonstration of the government's attitude to business reliefs in the shape of the huge reduction in the lifetime limit for Entrepreneurs’ Relief, from £10 million to £1 million. 

So, this month, in addition to the review of the IHT mitigation schemes we will also touch on more general IHT planning with business and agricultural assets.

IHT mitigation schemes

What prompted me to write about this particular topic was a question from one of Technical Connection’s clients which was as follows: Am I right in thinking that the “traditional” IHT planning vehicles, such as Discounted Gift Plans, Loan Plans etc, are exempt from being registered under DOTAS?

For those not fully familiar with the subject,  DOTAS stands for disclosure of tax avoidance schemes and, for those involved with estate planning,  the important point to remember is that whilst the rules had applied for many years in relation to income tax, corporation tax, stamp duty  and CGT, in 2011 they were extended to IHT. The rules basically mean that certain arrangements intended to save tax must be notified to HMRC. While detailed consideration of this topic is beyond the scope of this article, it is important to be aware of the key issues, particularly in relation to IHT mitigation schemes marketed by financial services providers.

Most "packaged" IHT schemes are offered by life assurance providers and these will normally be based on a combination of a life assurance investment bond (“bond”) and a trust. These include arrangements which have always been considered inoffensive, such as gifts to a trust where the settlor does not retain any interest. However, when it comes to an arrangement where the settlor does retain an interest but the  trust is not subject to the gift with reservation provisions (usually because the settlor's rights are "carved-out" and held for the settlor absolutely while the remainder of the fund is held for other beneficiaries) so that the gift is IHT effective (and normally also avoids the POAT charge), matters have not always been totally straightforward.

The main types of arrangement are the following:

  • Loan trusts and Gift and Loan trusts – where the settlor's right is restricted to the repayment of a loan he has made to the trustees. These could be based on discretionary or bare trusts;
  • Discounted gift trust (DGT) schemes – where the settlor retains a right to a series of fixed capital payments funded by withdrawals from the bond, held under a discretionary or bare trust. These may be set up with a life insurance or a capital redemption policy;
  • Flexible reversionary trusts – where the settlor is entitled to the proceeds of a bond at a certain time in the future, including arrangements where the retained rights can be varied or defeated by the trustees.

The above arrangements as well as certain trusts of life assurance protection plans, such as  "split" or retained interest trusts (where the settlor remains entitled to benefits payable on critical or terminal illness while the death benefit is held for others), had generally been accepted by HMRC as inoffensive and were in fact specifically excepted under the original DOTAS regulations. This is referred to as a “hallmark” and the original IHT hallmark included  “grandfathering” provisions  which excepted from the disclosure requirements  any IHT arrangements which were  the same, or substantially the same, as any schemes first becoming available, or  implemented, before 6 April 2011.  

Returning to the above-mentioned question, unfortunately, especially since the new 2018 DOTAS Guidance, matters are not quite so simple.

This is because the grandfathering provisions mentioned above no longer apply so the schemes have to be tested against the new hallmark.

Now, whilst Loan trusts and Gift and Loan trusts are specifically mentioned as not being notifiable, as far as the DGTs and reversionary trusts are concerned for these to be excepted under the “established practice exception” these are the conditions:

  1. The scheme (involving a donor carving out and retaining rights to certain future payments under an insurance product) has been sold and implemented at least once before 1 April 2018, and
  2. HMRC has indicated its acceptance that it achieves that well understood tax outcome, and
  3. it is sold and implemented again without being changed.

All of the schemes mentioned above remain popular within estate planning strategies, but we have also seen some variations on the theme. Advisers recommending any new arrangements should verify with the relevant provider whether a particular scheme is subject to the DOTAS rules.

Planning with business and agricultural property

The current reliefs are considered to be very generous, in particular the provisions for mixed trading / property businesses for the purpose of what is commonly known as the 'wholly or mainly' test.  Currently, if the trading part of the business exceeds 50% of the business, i.e. is 'wholly or mainly' trading, then BPR may be claimed on the value of the whole business. In many cases the relief is at 100%.

It has been suggested that this treatment is overly generous and that the threshold for a business to qualify for BPR might be increased so that the business must be at least 80% trading. This would bring the IHT definition of trading business into line with that for CGT. Obviously, we will not know what changes are going to be introduced but this is one area that clients to whom this is relevant should bear in mind.

Next is the area of investments qualifying for BPR, such as investments in an EIS. Subject to satisfying the two-year ownership period, such investments will be free from IHT on death. Changes to these rules have also been mooted and, since it is unlikely that any changes will be retrospective, those whose risk profile fits this type of investment may wish to consider reviewing their investment portfolio.

Finally, all those business owners who have considered passing the business or a share of it down to the next generation during lifetime may wish to take action sooner rather than later.

Clearly, the topic of estate planning for business owners is more complex than can be covered in one article and we will no doubt come back to it in future articles. However, here are some key tax points to bear in mind when considering lifetime gifts of business or agricultural assets.

Inheritance tax (IHT)

Gifts to individuals and to absolute (bare) trusts will be potentially exempt transfers (PETs). Gifts to any other trusts will be chargeable lifetime transfers (CLTs).

If the asset gifted qualifies for 100% BPR (e.g.  shares in a private unquoted company), the value of the gift for IHT (when made) will be nil regardless of the actual value. However, if the donor dies within 7 years of the gift, the value of the gift will have to be recalculated without BPR if the donee has in the meantime disposed of the asset.

The gift will be effective provided there is no reservation of benefit by the donor. Any ongoing remuneration from the business that the donor will take (say, as a managing director) should be commercially justifiable. Any pension provision should be maximised before any gift is made.  The donor should not attempt to secure favourable pre-emption rights.

A gift into a trust rather than an outright gift may offer continuing control and more security and so may be more acceptable to a potential donor,

Capital gains tax (CGT)

A gift of an asset to a connected person, e.g. a family member or to a family trust, is deemed to be a disposal at market value for CGT purposes. However, where the asset in question consists of shares in an unquoted trading company then "hold-over" gift relief can be claimed by an election made by the transferor and transferee.

The hold-over relief which applies to business assets is more generous than hold-over relief which applies to transfers to relevant property trusts, in that with business assets hold-over relief may be claimed on outright gifts to individuals as well as on gifts to trusts. Remember though that, as mentioned above, the definition of business property is stricter for CGT than it is for IHT.

Also note that hold-over relief is not available if the trust is a "settlor-interested" trust. A settlement is settlor-interested if a settlor, a settlor’s spouse/ civil partner or minor child can benefit directly or indirectly under the trust. In addition, hold-over relief obtained in relation to transfers to trustees of settlements will be clawed-back if the trust becomes settlor –interested within 6 years from the start of the tax year following that in which the transfer is made.

The above are just some of the key issues to bear in mind. There may be other methods of passing the business down to the next generation as part of estate planning, including share reclassification. Clearly, professional advice will be essential.

The above is mainly relevant to businesses run as limited companies as, in such cases, transfers of shares are relatively uncomplicated. The planning is more complex where partnerships, LLPs and farms are involved. Again, specialist advice will be needed.

Tax avoidance generally in the light of budget 2020

As announced in the Budget on 11 March the government is taking action to further tackle tax avoidance. This is happening now in three new areas:

First, the government has called for evidence to inform future policy decisions designed to raise the standard of tax advice available to taxpayers. Although this initiative stems from the recent independent review into the loan charge, the ultimate aim is to enhance tax compliance (and so raise revenue) and continues the trend of targeting advisers as well as taxpayers.

To this end the government is exploring ways of combating incompetent, unprofessional and corrupt tax advisers. Possible action ranges from using existing legislation better to setting up a more formal regulatory framework for tax advisers such as currently applies to charities and financial advisers.

Second, the government has released a policy paper entitled “Tackling promoters of mass-marketed tax avoidance schemes”.

This mainly focuses on promoters who target individuals on middle incomes, often through promises of income tax savings under disguised remuneration schemes and looks to ways in which HMRC can operate  including  collaboration with other agencies and overseas tax authorities  and  expanding the scope of checks into the tax affairs of promoters of avoidance schemes.

Third, there are a number of procedural changes to the General Anti-Abuse Rule (GAAR) in the Finance Bill 2020, for example allowing HMRC to take counteraction measures against taxpayers even before the GAAR’s procedural requirements have been met. and HMRC will be given more time to pursue their enquiries into taxpayers’ affairs.

Some technical amendments to the Promoters of Tax Avoidance Schemes (POTAS) legislation have also been proposed, in particular to ensure that HMRC’s enquiry process is not disrupted by legal challenges.

There is a clear message here that artificial schemes and those who promote them should be avoided.

In terms of IHT avoidance schemes, this anti tax avoidance attitude has also recently been confirmed by the Courts, in the decision related to the so called " home loan scheme" (Shelford v HMRC, 2020 UKFTT 0053 TC), which we will cover in a future article.


Clearly, there is currently much to discuss with clients, especially with those who own business assets. Of course, estate planning is not just for business owners or for those with investments qualifying for BPR. One apparent silver lining of the recent drop in stock market values is that stocks and shares can be gifted at the lower value and therefore with lower potential CGT liabilities on disposals. And lifetime gifting of any asset is still the best way to reduce your estate for IHT purposes.


Read more in part 1 of Estate planning during coronavirus here

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This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.


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