The Government intend to introduce new regulations on how DOTAS applies to Inheritance Tax Avoidance Schemes.

The Disclosure of Tax Avoidance Schemes (DOTAS) Regulations are an important weapon available to HMRC in its fight against tax avoidance schemes.  In essence, if a scheme satisfies certain conditions, any person involved in the promotion of the scheme must disclose details of the scheme to HMRC.  If they do not comply with this requirement, they risk suffering substantial penalties.

Revised DOTAS Regulations have been published in relation to schemes established to avoid inheritance tax.  These Regulations are set out in Statutory Instrument 2017 No. 1172 entitled ‘The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017’.  The rules come into force on 1 April 2018.

Under the revised rules, a scheme will be notifiable for IHT purposes if it falls within the description in Regulation 4.  An arrangement will be covered by Regulation 4 ‘if it would be reasonable to expect an informed observer (having studied the arrangements and having regard to all relevant circumstances) to conclude that conditions 1 and 2 are met’.

In this respect:

Condition 1  – is that the main purpose, or one of the main purposes, of the arrangement is to enable a person to obtain one or more of the following IHT advantages:

  • the avoidance or reduction of an entry charge on a relevant property trust
  • the avoidance or a reduction in specified IHT charges under certain sections of the IHT Act 1984 (mainly relating to relevant property trusts)
  • the avoidance or a reduction in an IHT charge under the gift with reservation rules (in cases where the POAT charge does not apply)
  • a reduction in a person’s taxable estate with no corresponding lifetime transfer.


Condition 2  – is that the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.

It is important to note that certain arrangements are excepted from the new provisions.  Most notably if they:

  • implement a proposal which has been implemented by related arrangements; and
  • are substantially the same as the related arrangements


In this requirement “related arrangements” are defined as arrangements which

  • were entered into before 1 April 2018; and
  • at the time they were entered into, accorded with established practice of which HMRC had indicated their acceptance.


These new Regulations adopt a much broader approach to what was previously proposed.  In particular, there is now no specific exclusion from the DOTAS Regulations for loan trusts, discounted gift trusts and reversionary interest trusts.

However it is probably reasonable to take the view that all of these 3 types of scheme are examples of arrangements that were generally acceptable before 1 April 2018 and would have been acceptable under established HMRC practice.

This would be on the basis that HMRC are aware of these arrangements and, indeed, in the case of discounted gift trusts, have issued tables of discounted values.

It is hoped that the precise position will be clarified with HMRC in the near future.


HMRC has updated its guidance for penalties for enablers of tax avoidance schemes.

Following our earlier bulletin, HMRC has updated its guidance for penalties for enablers of tax avoidance.

The guidance supports new legislation introduced in Clause 65 and Schedule 16 of Finance (No 2) Act 2017.

The legislation takes effect from 16 November 2017 which is the date of Royal Assent to the Finance (No.2) Act 2017. The legislation only applies where there are abusive tax arrangements that have been defeated and both of the following apply:

  • the tax arrangements are entered into on or after 16 November 2017
  • the enabling action is taken on or after 16 November 2017


We have covered this subject in detail in various bulletins on Techlink, however in summary:

  • The term “enabler” is intended to include anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements which are later defeated.
  • The focus will therefore be on those who benefit financially from enabling others to implement tax avoidance arrangements which fail.
  • The legislation gives HMRC the power to tackle all aspects of the marketed avoidance supply chains, complementing the suite of anti-avoidance measures already in place. Activities which constitute enabling will include designing, marketing or facilitating the use of abusive tax arrangements that are defeated. .
  • There will be safeguards for the vast majority of tax professionals who already adhere to professional standards, such as the Professional Conduct in Relation to Taxation and the Code of Practice on Taxation for Banks.
  • A penalty only arises where a taxpayer has entered into abusive tax arrangements and those arrangements are subsequently defeated.  The penalty will be linked to the enabler’s fees; HMRC will be able to estimate this if enablers seek to disguise their fee levels.



The recent decision in JSC Mezhdunarodniy Promyshlenniy Bank and another v Pugachev and others [2017] EWHC 2426 (Ch) shows willingness of the Courts to strike down sham trusts.

It is well known that for a trust to be legally effective, the settlor must divest himself of the beneficial ownership of the trust property. This is especially important where the settlor is one of the trust beneficiaries or has reserved extensive powers for himself. If the trustees do not assume proper control over the trust property and simply follow the settlor’s instructions, the chances are the trust will be declared to be a sham or a mere illusion (there is only a subtle difference in law between the two). There have been a number of cases where a trust has been declared to be a sham and therefore not valid. For more information on shams, please see here. As for trying to avoid creditors, even if a trust is not a sham, there are provisions in the Insolvency Act 1986 which allow a trust to be set aside if created with the intention to defraud creditors (regardless of when it was set up).

The Pugachev decision is interesting as it comes soon after the Panama Papers and Paradise Papers and the considerable publicity given recently to tax avoidance involving hiding assets offshore. It is also interesting because the claimants based their case on three separate arguments so as to cover all angles. In the event they won on all three counts.

The facts

The facts of the case were as follows:

Mr Sergei Pugachev, a Russian national, founded Mezhprom Bank in Russia in 1992. Following the 2008 financial crisis the bank suffered losses and was ultimately declared insolvent in 2010. The Russian state agency, Deposit Insurance Agency (DIA), was appointed as liquidator.

Between 2011 and 2013, Mr Pugachev settled over US $95 million of his assets in five New Zealand discretionary trusts.

Although the majority of the assets had notionally been settled on trust by Mr Pugachev’s son, Viktor, the assets originated from Mr Pugachev (indeed the judge decided that Mr Pugachev should be treated as the settlor of the trusts as Viktor was in effect acting as his nominee).

The trusts held assets largely for the benefit of Mr Pugachev, his partner and their minor children.

The trusts were governed by New Zealand law and were set up with the assistance of a New Zealand solicitor. The solicitor and his wife were directors of the companies that acted as trustees.

There was in fact a case brought in the New Zealand Court where the original trustees had been removed with the agreement of the Court. Although the New Zealand court suggested that it considered the trusts to be neither illusory nor shams, this was apparently based on deficient and incorrect information given to the New Zealand Court.

Mr Pugachev was the protector of each of the trusts, with Viktor named as successor protector. The trust deeds provided that Mr Pugachev’s protectorship would automatically terminate in circumstances where he was “under a disability”, a term which included when Mr Pugachev was subject to the claims of creditors. The protector’s powers were unusually extensive and included powers to:

  • veto the distribution of income or capital from the trusts;
  • veto the investment of the trust funds;
  • veto the removal of beneficiaries;
  • veto any variation to the trust deeds;
  • veto the release or revocation of any power granted to the trustees;
  • veto the early termination of the trust period;
  • appoint and remove trustees, with or without cause;
  • add further beneficiaries; and
  • veto an amendment to the trusts by the trustees.


Back in Russia the DIA alleged that Mr Pugachev had misappropriated Mezhprom Bank assets prior to the liquidation and in 2015 the Russian Court gave judgment against Mr Pugachev in the sum of approximately US $1 billion. Mr Pugachev fled Russia and moved to England. (Hence the case heard in the English Court).

The DIA began enforcement proceedings in England and obtained a GBP £1.1 billion worldwide freezing order against Mr Pugachev’s assets. He was also sentenced to two years’ imprisonment for contempt of court which he has not served as he fled to France.

The argument

Mezhprom Bank and the DIA (the Claimants), sought to “bust the trusts” and enforce the judgement against the assets of the trusts on three separate bases:

  1. The trusts were illusory and of no substance because the trust deeds, properly construed, did not divest Mr Pugachev of his beneficial ownership in the trust property;
  2. Alternatively, the trusts were shams and of no effect because the common intention was that the assets would continue to belong to Mr Pugachev; and
  3. In the alternative to the first two claims, if the trusts were effective and divested Mr Pugachev of ownership of assets, they should be set aside under section 423 of the Insolvency Act 1986 because the intention was to prejudice the interests of Mr Pugachev’s creditors. 


The judgment

As indicated above the High Court agreed with all three arguments.

Re: Illusory Trusts

The Court concluded that these were bare “illusory” trusts. Mr Pugachev was the settlor, discretionary beneficiary and protector of the trusts. He retained extensive control because he could dismiss the trustees and veto how they exercised their powers, and consequently retained beneficial ownership of the assets he put into the trust.

Re: sham

The Court decided that it was a sophisticated and subtle form of sham. The intention was for Mr Pugachev to retain ultimate control, but to hide this control from third parties by giving a false impression that he had only limited powers as protector. The second protector, Victor, acted on his father’s instructions and whilst the other beneficiaries (his children) would benefit from the trust, they only did so through the decisions of Mr Pugachev. In addition, the New Zealand solicitor who acted as director of each of the trustee companies had no independent will to that of Mr Pugachev.

Re: Section 423

The Court found that if the trust deeds did divest Mr Pugachev of his beneficial interests in the assets, then it was with the purpose of hiding his control of the assets in the trusts from his creditors and so should be set aside.

Given especially the extensive powers that Mr Pugachev reserved for himself it is not really surprising that the Court found against him, especially given the specific facts and circumstances, which are probably not that common. However there are some important lessons here for all  potential settlors, namely that the  retention of excessive control over a trust arrangement may lead to successful claims by third parties that the settlor has never successfully divested himself of the beneficial ownership of  the relevant assets.


The Pensions Regulator is to prosecute a Birmingham based company for falsely claiming they had met their AE duties.

The Pensions Regulator (TPR) is to prosecute a healthcare company and its managing director for trying to avoid providing their staff with a workplace pension.

Birmingham-based Crest Healthcare and managing director Sheila Aluko are accused of wilfully failing to comply with their automatic enrolment duties under section 45 of the Pensions Act 2008.

Both defendants are also accused of falsely claiming that they had enrolled 25 staff into a workplace pension scheme. Knowingly providing false information to TPR is an offence under section 80 of the Pensions Act 2004.

Crest Healthcare and Sheila Aluko have been summoned to appear at Brighton Magistrates’ Court on 22 December 2017.

They will each face two charges of wilfully failing to comply with their automatic enrolment duties and one charge of knowingly or recklessly providing false or misleading information to TPR.  Both charges can be tried in a Crown Court or in a magistrates’ court. In a Crown Court the maximum sentence for each is two years’ imprisonment. In a magistrates’ court, the maximum sentence for each is an unlimited fine.

This is another example of the TPR taking their statutory objectives very seriously. It will be interesting to see any outcomes of the round-the-country AE spot checks.


HMRC have issued a newsletter providing an update on work done and information to help prepare for April 2018 

HMRC have published another newsletter following their last update in May 2017. This newsletter gives an update on the work they and undertaken in the interim and information to help scheme administrators prepare for April 2018.

The newsletter includes details on the following:

  • Scottish Budget
  • Notification of residency status report
  • Residency status look up service
  • How to apply relief at source rate for the whole tax year
  • How to submit your annual return of individual information to HMRC
  • Relief at source draft regulations 


Scottish Budget

The Government and HMRC will be working closely with the Scottish Government and with pension providers on the implications of that change for pension tax relief, and to clarify how the mechanisms for providing relief will operate in respect of Scottish pension savers.

Notification of residency status report

HMRC aim to tell administrators the residency tax status of scheme members for the first time in January 2018, so that they can apply the correct rate of relief at source to your scheme members in the tax year 2018 to 2019. This information will then be sent each January going forward.

This information will be sent via the secure data exchange service (SDES).

The report will tell administrators the residency tax status of each of the scheme members on the notification of residency status report by adding an additional field to the original information submitted showing:

  • an S for Scottish tax status
  • a U for unmatched individuals
  • a blank field for rest of the UK


In addition they will add a field including the National Insurance number submitted for an individual if it is incorrect and provide the correct one.

Residency status look up service

The residency status look up service is still being developed and will be announced in pension scheme newsletters when available. This newsletter gives more details on how the look up works and what information will be returned.

How to apply relief at source rate for the whole tax year

Administrators must apply the same tax rate for a member for the whole of a tax year, even if their status has changed since they received the notification of residency status report or their last residency status was looked up.

If a new member joins the scheme and the administrator is unable to look up their status before they apply tax relief at source to the first contribution, they must default the member’s residency status to rest of UK and maintain this rate for the whole tax year.

If no notification of residency is received and they didn’t look up the residency status of the member, they administrator must also default their residency status to rest of UK.

Shortfalls or excess payments of relief at source at the end of the tax year will be collected or repaid directly to the member.

How to submit your annual return of individual information to HMRC

Details of how to submit the annual return via the SDES are included in the newsletter.

Relief at source draft regulations

The Registered Pension Schemes (Relief at Source)(Amendment) Regulations 2018 were issued for a short consultation.


Revenue Scotland had conceded, after representation, that in-specie transfers of Scottish properties will not be subject to the Land and Buildings Transaction Tax as previously announced. 

In a Technical Bulletin issued by Revenue Scotland confirms that in-specie transfers of Scottish Properties between pension schemes will not be subject to the Land and Buildings Transaction Tax.

In its October 2016 LBTT Bulletin Revenue Scotland published a brief statement to clarify its view of the treatment for LBTT purposes of in-specie transfers between pension funds.

The October bulletin indicated that, in-specie transfers between pension schemes were subject to the charge because such a transfer is a land transaction and the assumption of liability by the receiving pension fund is debt as consideration. However, following further representations on the matter, Revenue Scotland has now concluded that while such transfers are still considered to be land transactions, debt in the form of the liability assumed to pay benefits to pension scheme beneficiaries will not generally be considered to be given as chargeable consideration in relation to such transactions. However, any consideration given in the form of money or money’s worth for the transfer of the properties will be chargeable to LBTT.  Revenue Scotland has also confirmed that if LBTT has been paid they will consider a repayment and applications should be made by amending their original submission.

This is good news for those that may want to move pension providers but currently hold commercial property in their portfolio. This brings the treatment of these types of transfers back in line with HM Revenue and Customs so as not to disadvantage those who hold Scottish properties in their pension schemes.

In-specie transfers should not be confused with in-specie contributions where Stamp Duty Land Tax (England) and Land and Buildings Transaction Tax (Scotland) would apply.

The content of this newsletter is for information only. It does not represent personal advice or a personal recommendation, and should not be interpreted as such. Please do not act upon any part of it without first having consulted an Independent Financial 

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