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Determining a DOTAS IHT scheme – the tests

A proposal or arrangement is notifiable under DOTAS as an IHT scheme if:

there are arrangements which are expected to provide an IHT advantage

this advantage is expected to be one of the main benefits of the arrangements and

the arrangements fall within one of three hallmarks which apply for IHT

The Inheritance Tax Avoidance Schemes (Prescribed Description of Arrangements) Regulations 2017 (SI 1172/2017) give the description, or IHT hallmark, of arrangements that have to be notified. These regulations take effect from 1st April 2018 and replace the previous IHT hallmark prescribed in The Inheritance Tax Avoidance Schemes (Prescribed Description of Arrangements) Regulations 2011 (SI 170/2011).

The 2011 IHT hallmark included ‘grandfathering’ provisions to except from disclosure arrangements that were first made available before 6th April 2011 or which were substantially the same as arrangements first made available before that date. These ‘grandfathering’ provisions cease to apply from 1st April 2018 when the new IHT hallmark takes effect. This means that arrangements that would have been excepted from disclosure before 1st April 2018 under the 2011 hallmark will, from 1st April 2018, have to be tested against the new IHT hallmark.

In addition to the specific IHT hallmark, the confidentiality and premium fee hallmarks were extended to cover IHT with effect from 23rd February 2016. Guidance on the application of those hallmarks can be found in paragraphs 7.3 to 7.3.6 and 7.5 to 7.5.3 above. Neither the grandfathering exception described in the previous paragraph nor that described below in relation to the new hallmark apply to an IHT scheme which is disclosable under either the confidentiality or the premium fee hallmark.

The IHT hallmark and how it works

The IHT hallmark provides that an arrangement is notifiable if it would be reasonable to expect an informed observer, who has studied the arrangements and had regard to all relevant circumstances, to conclude that conditions 1 and 2 are met. ‘Arrangements’ takes it meaning from section 318 of Finance Act 2004 and includes any scheme, transaction or series of transactions.

The ‘informed observer’ test is crucial as this provides the context in which the conditions are to be judged.

The informed observer is to be contrasted with an ‘uninformed observer’, but isn’t an expert or necessarily a tax practitioner.

The informed observer is independent, has all the relevant information about the scheme and has sufficient knowledge to understand both the scheme and the relevant statutory context.

The informed observer is assumed to have the appropriate knowledge and skillset to reach the conclusions that the hallmark requires.

While the promoter isn’t an informed observer for this purpose, the informed observer should be presumed to have access to all of the information that is available to the promoter of the scheme.

The scope of ‘all relevant circumstances’ will vary according to the nature of the arrangements, but circumstances which may be relevant for the informed observer to take into account include:

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The non-tax benefits that are expected to arise from the arrangements

The overall effect or consequences of the arrangements

The terms of the documentation and the substance of the arrangements, and

HMRC guidance and published statements

The promoter or other person with a potential duty to notify HMRC about the scheme is required to consider whether an informed observer, who has studied the arrangements and taken all relevant circumstances into account, could reasonably be expected to conclude that:

the main purpose, or one of the main purposes, of the arrangements is to obtain one of the tax advantages listed in condition 1, and

the arrangements involve the use of one or more contrived or abnormal steps without which the tax advantage could not be obtained.

The hallmark conditions

The IHT hallmark has two conditions. Both conditions have to be met for the arrangement to be notifiable.

Condition 1

Condition 1 is that the main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain an advantage in relation to inheritance tax set out in one or more of sub-paragraphs (a) to (d).

In most cases it should be clear whether the main purpose, or one of the main purposes, of the arrangements is to secure one of the listed tax advantages, or whether the tax advantage arises inadvertently as a by-product of the arrangements. As this has to be determined by reference to how an ‘informed observer’ would view the arrangements, this test should be relatively straightforward.

Condition 1 focuses on areas of highest risk and greatest concern to HMRC. The tax advantages listed under condition 1 are:

(a) the avoidance or reduction of a relevant property entry charge

This imports the wording from the 2011 IHT hallmark. Arrangements, the main purpose, or one of the main purposes, of which is to reduce or avoid the charge which would otherwise arise when property becomes relevant property are within (a).

(b) the avoidance or reduction of a charge to inheritance tax under section 64, 65, 72 and 94 of IHTA 1984

This focuses on the avoidance or reduction of the charge on relevant property at the ten-year anniversary – s.64; the charge on relevant property at any other time – s.65; the charge arising on property leaving employee or newspaper trusts – s.72; and the charge arising in connection with close company transfers – s.94.

(c) the avoidance or reduction of a charge to inheritance tax arising from the application of section 102, 102ZA, 102A, or 102B of the Finance Act 1986 in circumstances where there is also no charge to income tax under Schedule 15 to the Finance Act 2004 (charge to income tax on benefits received by former owner of property)

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This relates to arrangements that seek to avoid the inheritance tax implications of being a gift with reservation of benefit, but where there is also no pre-owned asset income tax charge under Schedule 15 to the Finance Act 2004.

(d) a reduction in the value of the person’s estate without giving rise to a chargeable transfer or potentially exempt transfer.

This relates to arrangements where a person removes value from their estate without that reduction giving rise to either a chargeable transfer or a potentially exempt transfer. A reduction in the value of a person’s estate other than an arm’s length bargain will usually give rise to a transfer of value under section 3 IHTA 1984.

While condition 1 identifies arrangements that reduce or avoid the charges to inheritance tax set out in paragraphs (a) to (d) above, these arrangements are only notifiable if they also meet condition 2. There will be many commonly used tax planning arrangements that fall within one or more of (a) to (d) above, but which will not cause condition 2 to be met and which are therefore not notifiable.

Condition 2

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

When considering this condition, it is the arrangements that must be reviewed to conclude whether they involve one or more contrived or abnormal steps and then to consider whether those contrived or abnormal steps are necessary to achieve the tax advantage.

For example, the use of trusts is not itself contrived or abnormal. A gift into a discretionary trust would not, on its own, meet condition 2. The gift would be an immediately chargeable transfer and the fact that the gift was to a discretionary trust would not, on its own, mean that the arrangements by way of which the gift is made include a contrived or abnormal step.

If a more complex trust structure was used instead, for example for added protection of the trust assets, the additional complexity might lead an informed observer to conclude that those additional steps are ‘contrived or abnormal’ in the sense that it was unusual to go to those lengths and levels of complexity. However, condition 2 will only be met if the steps that are contrived or abnormal are required to achieve a tax advantage.

To an ‘uninformed observer’ the creation of a trust might seem like an unusual and therefore abnormal thing to do. Equally the idea of creating a trust and then making a loan to the trustees of that trust might seem contrived to an uninformed observer.

However, whether arrangements are contrived or abnormal, or involve contrived or abnormal steps, has to be considered from the point of view of an ‘informed observer’. A straightforward trust arrangement is not contrived or abnormal in this context. Nor is the making of a loan to trustees of a trust that an individual has set up, or to a company to which the individual has a connection. Equally, choosing to invest money into assets which will qualify for relief from inheritance tax may or may not be commonplace, but in the context of the ‘informed observer’ such an investment, on its own, would be neither contrived nor abnormal.

The inclusion of the words ‘contrived or abnormal’ and the requirement for them to be considered by the hypothetical informed observer mean that normal and straightforward inheritance tax planning will not be notifiable. Inheritance tax planning that requires greater complexity or contrivance to achieve the intended tax advantages though is likely to be notifiable. In particular it can be helpful to

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consider whether the economic consequences are as expected. Making a gift presupposes that the donor no longer beneficially owns the gifted property. If the donor is able to enjoy the gifted property in broadly the same way as previously this might well be an indicator of a disclosable scheme.

The ‘established practice’ exception

The new hallmark takes effect from 1st April 2018, so a proposal which was made available before that date would not have been notifiable at that time. However, where that proposal is implemented again on or after 1st April 2018 a duty to notify would arise under s.308(3) FA04. The established practice exception is intended to ensure that such a duty does not arise if the conditions in the exception are met.

Arrangements are excepted from being prescribed, i.e. they will not be notifiable, if they:

(a) implement a proposal which has been implemented by related arrangements, and

(b) are substantially the same as the related arrangements.

‘Related arrangements’ are defined as arrangements which:

(a) were entered into before 1st April 2018, and

(b) at the time they were entered into, accorded with established practice of which HMRC had indicated their acceptance.

This provision is designed to remove from the scope of the hallmark established IHT planning schemes whose workings are well understood and agreed. Such schemes are excepted if:

that scheme has been sold and implemented at least once before the new hallmark takes effect

HMRC has indicated its acceptance that it achieves that well understood tax outcome, and

it is sold and implemented again without being changed after the hallmark takes effect

The proposal or scheme

The first stage is to establish whether the proposal or scheme in question, which is being implemented by the present arrangements, was implemented in the same form before 1st April 2018. If that proposal has not been implemented before 1st April 2018 the exception does not apply. Even if the exception does apply, it is still necessary to test the proposal or arrangements against the premium fee and confidentiality hallmarks, which means the proposal or scheme may be notifiable by virtue only of one or both of those hallmarks.

For the exception to apply the present arrangements must implement a proposal which has previously been implemented by related arrangements. It is therefore important to identify the proposal which the present arrangements are implementing.

The proposal is the specific combination of elements or steps which are designed to achieve the intended tax advantage and which is being made available to a potential user. While there may be a number of very similar proposals in existence which are designed to achieve the same tax advantage, for example different companies offering their own versions of a tax saving scheme, each would be a separate proposal.

The exception applies to arrangements which implement a proposal which has been implemented by related arrangements. It follows that the proposal which is being implemented by the present

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arrangements has to be the same proposal that was implemented by the related arrangements before 1st April 2018. The exception does not apply to arrangements which implement a different proposal. That other proposal must be considered on its own merits.

By way of example, Insurance Co have offered their clients a Discounted Gift Trust v1.0 since 2010. This proposal was first implemented in 2010 and continues to be offered in April 2018 in exactly the same way. The implementation of this proposal by arrangements entered into after 1st April 2018 would be the implementation of a proposal that has previously been implemented before 1st April 2018 and which, subject to satisfying the established practice requirements, would be within the exception. The arrangements would still have to be tested against the confidentiality and premium fee hallmarks but if they accord with established practice they would seem likely not to be notifiable under the IHT hallmark

However, suppose Insurance Co decide that they want to make changes to the elements or steps which are required to achieve the intended tax advantage and after 1st April 2018 offer their clients what amounts to Discounted Gift Trust v.1.1 (notwithstanding that they may choose not to change the name or version number). This is a new proposal, even though it may be ‘substantially the same’ as Discounted Gift Trust v1.0. This proposal and any arrangements that implement it are not excepted, and must be tested by reference to the new IHT hallmark as well as the confidentiality and premium fee hallmarks.

Changes to a proposal or scheme which do not affect the elements or steps that are required to achieve the intended tax advantage would not result in this being a new proposal. For example, changes to the name of the scheme or the entity making the proposal, or changes for other regulatory reasons that do not affect the elements or steps which lead to the intended tax advantage, would not give rise to a new proposal.

If the proposal had previously been implemented before 1st April 2018, the next step is to consider whether the previously implemented arrangements are ‘related arrangements’.

Related arrangements

In order to be ‘related arrangements’, the earlier arrangements must:

have been entered into before 1 April 2018, and

at the time they were entered into those arrangements, have accorded with established practice of which HMRC had indicated their acceptance

Established practice and HMRC’s acceptance of that practice

There are two elements to this requirement. The first is to consider whether the arrangements ’accord with established practice’, and secondly whether HMRC has indicated acceptance of that established practice.

Taking the ’established practice’ first, this is not defined in the legislation and therefore takes its ordinary meaning.

Established practice may be demonstrated by reference to published material (whether from HMRC, or text books or articles in journals) or by other written evidence of what had become a common practice by the relevant time (that is, when the arrangements were entered into).

It is then necessary to consider whether the arrangements actually carried out were the same as those identified as established practice, or whether there were any significant differences between the

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actual arrangement in question and those that were commonly carried out. If, for example, the particular difference between the actual arrangement and the ‘normal’ arrangement was the introduction of some feature which was designed to achieve a particular tax advantage, then it is doubtful that the actual arrangement accorded with established practice.

The second requirement is that HMRC had, at the time the arrangements were entered into, indicated its acceptance of the established practice. This may have been through published material such as guidance or other means. For example, HMRC may have made a clear statement in its published tax bulletins, or its internal manuals, or in correspondence with some representative body (such as Society of Trust & Estate Practitioners, the Chartered Institute of Taxation, or other similar body).

Substantially the same

Having determined that the current arrangements implement a proposal that had previously been implemented by related arrangements but which would not have been notifiable as it pre-dates the 2018 IHT hallmark, the final criteria for arrangements to be within the exception is that they must be ‘substantially the same’ as the current arrangements.

It is therefore useful to set out what is meant by ‘substantially the same’ in this context.

It is important to bear in mind that the ‘substantially the same’ requirement relates to the arrangements being implemented and the related arrangements, not to the proposal that the arrangements are implementing. For the exception to apply the current arrangements have to implement the same proposal as was implemented by the ‘related arrangements’.

Minor changes, for example to reflect the different personal details of users, will not stop arrangements from being substantially the same. For example, a retail discounted gift product would provide for the user to specify the sum of money being placed into the product, the chosen beneficiaries, the amount and frequency of the payments that the user is to carve out for their own benefit and so on. These differences in personal details do not change the underlying proposal, so that, for example, an implementation of Discounted Gift Trust v1.0 by arrangements entered into by Ms Jones, investing £250,000 and retaining withdrawals of £1,041.66 per month, would be substantially the same as the implementation of Discounted Gift Trust v1.0 by Mr Smith, investing £1 million and retaining withdrawals of £75,000 per annum.

However, where the arrangements being implemented are altered beyond merely making the necessary changes to effect the proposal for that individual, the arrangements will no longer be ‘substantially the same’ and will not be capable of being related arrangements.

Examples of arrangements which are not notifiable

As set out above, the hallmark does not catch straightforward inheritance tax planning. The examples below show how some of these arrangements (which could include proposals) would be tested against the hallmark. Bear in mind however, that arrangements must always be tested against all relevant hallmarks, which, for IHT, includes confidentiality and premium fee.

Ordinary outright gifts are not notifiable, even where they are exempt

Example 1: A lifetime gift to a spouse or civil partner

Condition 1 Such a gift is caught by condition 1(d) as at least a main purpose of the gift is to reduce the value of the person’s estate without giving rise to a chargeable transfer or a potentially exempt transfer. Instead the reduction gives rise to an exempt transfer.

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But to be notifiable condition 2 must also be met

Condition 2 It is not reasonable to expect that an informed observer would conclude a straightforward gift or transfer of assets to a spouse or civil partner includes either contrived or abnormal steps. This is simply the use of an exemption provided for by the legislation.

Although condition 1 is met, condition 2 is not, so these arrangements are not notifiable under this hallmark.

Example 2: Regular gifts out of income

Condition 1 If these are gifts to an individual, they may be caught by condition 1(d) as a main purpose of the gifts is to reduce the value of the person’s estate without giving rise to a chargeable transfer or a potentially exempt transfer – they give rise to a series of exempt transfers.

If these are gifts into trust, they may also be caught by condition 1(a) in that they avoid or reduce a relevant property entry charge.

Again, although condition 1 may be met, to be notifiable condition 2 must also be met

Condition 2 It is not reasonable to expect that an informed observer would conclude it is either contrived or abnormal for a person to make regular gifts to those the person wants to benefit from their generosity where they are straightforward gifts to an individual or gifts into trust. This would just be the use of an exemption provided for by the legislation.

In some cases the person intending to make such gifts may be advised to record their intention or commitment in writing before making the gifts. Such a step might seem contrived or abnormal in the sense that unilateral gifts are commonly made without being pre-ordained, so that the pre-ordination appears abnormal. But in the context of the exemption for regular gifts out of income, which have to be part of the transferor’s normal expenditure, recording this commitment in advance is simply a step in demonstrating that the exemption is due. Recording the commitment does not secure the exemption, but it may help to establish that the exemption is due based on the subsequent transfers.

Although condition 1 is met, condition 2 is not, so these arrangements are not notifiable under this hallmark.

Example 3: Transfers of value equal to the available nil rate band into trust, which may be repeated every seven years

Condition 1 These gifts are chargeable but within the available nil rate band, so they are taxed at zero per cent. There is no reduction or avoidance of any charge set out in condition 1, so condition 1 is not met.

Condition 2 Even if the arrangements met condition 1, it would not be reasonable to expect an informed observer to conclude a gift of a sum equal to the available nil rate band on its own was either contrived or abnormal, or contained contrived or abnormal steps.

Neither condition 1 nor condition 2 is met, so these arrangements are not notifiable under this hallmark.

Example 4: Making a lifetime transfer to a bare trust for a minor beneficiary

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Condition 1 The transfer is a gift into a bare trust from which the donor cannot benefit. Although the transfer reduces the value of the transferor’s estate, it gives rise to a potentially exempt transfer. Condition 1(d) is therefore not met and the arrangement does not give rise to any of the other tax advantages set out in condition 1. This analysis would apply whether or not the trustees were able to defer actual payments to the beneficiary beyond the age of 18.

As condition 1 is not met there is no need to consider condition 2.

Executing a will, deed of variation or disclaimer which gives rise to exemption from inheritance tax

Example 5: Executing a will that leaves property to an exempt beneficiary such as the spouse or a charity

Condition 1 Executing a will does not meet any of the elements of condition 1. Although a will may be executed to reduce or avoid the IHT charge on death by use of exemptions, the will does not reduce the person’s estate. Rather the will determines how the estate devolves on death and it is this devolution which secures any IHT exemption. As there is no reduction in the person’s estate without giving rise to a chargeable transfer, condition 1(d) is not met.


Example 6: Executing a deed of variation to which s.142 IHTA 1984 applies to transfer assets on death to an exempt beneficiary

Condition 1 Executing a deed of variation may reduce the inheritance tax charge on a person’s death, but it does not meet any of the elements of condition 1 with regard to the person who has died as their estate is not reduced

A deed of variation is a lifetime transfer by the donor (the beneficiary) who originally inherited the property on the death. The property is treated as never being comprised in the donor’s estate, so there is no reduction in the donor’s estate and condition 1(d) is not met with respect to the donor.

This is not therefore a notifiable arrangement under this hallmark.


Example 7: Disclaiming an entitlement under a will to which s.142 IHTA 1984 applies where there is an exempt residuary beneficiary

Condition 1 Disclaiming an entitlement under a will where there is an exempt residuary beneficiary may reduce the inheritance tax charge on a person’s death, but it does not meet any of the elements of condition 1 with regard to the person who has died.

The beneficiary who makes the disclaimer is making a lifetime transfer of the property, but the property is treated as never being comprised in the beneficiary’s estate, so there is no reduction in the value of the beneficiary’s estate and condition 1(d) is not met.

This is not therefore a notifiable arrangement under this hallmark.


Acquisition of property which qualifies for a statutory relief or a transfer which is specifically provided for in the inheritance tax legislation

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Example 8: Purchase of shares which will qualify for business property relief after they have been owned for two years

Condition 1 The purchase of shares does not reduce the value of a person’s estate. If it becomes available, business property relief only has the effect of reducing the value transferred by a transfer of value, it does not remove the value of the shares from the estate. The act of purchasing shares in order to qualify for business property relief after two years does not, on its own, meet condition 1. It is not therefore a notifiable arrangement under this hallmark.


Example 9: Gift of land where the donor continues to use that land but pays full consideration for their use

Condition 1 The gift of land which the donor continues to occupy or use would normally be a gift with reservation of benefit, but the payment by the donor of full consideration in money or money’s worth for that use prevents section 102 FA 1986 applying. It would be reasonable to expect an informed observer to conclude that at least a main purpose of this arrangement is to reduce or avoid a charge to inheritance tax as a gift with reservation of benefit. As there is also no pre-owned assets income tax charge under Schedule 15 Finance Act 2004, this arrangement meets condition 1(c).

Condition 2 Even though condition 1 is met, the gift of land followed by payment of full consideration for use of that land would not, on its own, be regarded as contrived or abnormal, or involving contrived or abnormal steps. Sale and leaseback arrangements are not unusual in either the commercial world or for individuals (equity release).

Example 10: Gift of an undivided share of property which is subsequently used by both the donor and donee

Condition 1 The gift of land from which the donor continues to enjoy the benefit of occupation would be a gift with reservation of benefit, but where the donee has taken up possession and enjoyment of the property by occupying the property with the donor, section 102B Finance Act 1986 prevents this being a gift with reservation of benefit. There is no pre-owned assets income tax charge under Schedule 15 Finance Act 2004. Depending on all the relevant circumstances it is likely that an informed observer would conclude that obtaining the inheritance tax advantage was the main reason, or one of the main reasons for the arrangements. It would therefore be reasonable to expect an informed observer to conclude that condition 1(c) was met.

Condition 2 If condition 1 was met, the gift of a share in land followed by the donee occupying that land with the donor could not be said to be contrived or abnormal. The analysis might be different where the donor only retained a very small proportion of the property in comparison to their level of occupation.

Example 11: A non-UK domiciled individual who is not UK resident transfers funds from a sterling denominated UK bank account into a US dollar denominated UK bank account, so that the bank account is left out of account under section 157 IHTA 1984

Condition 1 The transfer reduces the value of the person’s estate that will be subject to inheritance tax on death, as the US dollar account will be ignored at that time. But the account remains part of the person’s estate, so there is no actual reduction in the value of that person’s estate and condition 1(d) is not met.


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Example 12: A non-UK domiciled individual transfers non-UK situs property into a trust just before they become deemed domiciled in the UK. The individual can benefit from the trust

Condition 1 The transfer reduces the value of the person’s estate, but this reduction does not give rise to a chargeable transfer or potentially exempt transfer due to section 3(2) IHTA 1984. It is likely that an informed observer would conclude that obtaining the inheritance tax advantage was the main reason, or one of the main reasons for the arrangements, so condition 1(d) is met.

Condition2 A transfer into a discretionary trust, on its own, is not contrived or abnormal. Although this arrangement is entered into to obtain an inheritance tax advantage, it is making use of the excluded property provisions. The transfer is not within condition 2 and is not a notifiable arrangement under this hallmark.

Example 13: Immediately before a ten-year anniversary a distribution is made from a relevant property settlement to reduce the charge on the subsequent ten-year anniversary

Condition 1 This arrangement meets condition 1(b) if it is reasonable to expect an informed observer to conclude that the main purpose, or one of the main purposes, of making the distribution is to reduce the charge at the ten-year anniversary. It would follow that condition 1(b) is met.

Condition 2 This arrangement does not contain any contrived or abnormal steps. The inheritance tax legislation applies a tax charge in respect of the distribution and another tax charge at the ten-year anniversary. The choice of making the distribution before the ten-year anniversary may be to achieve a lower overall inheritance tax bill, but the trustees choosing to exercise their powers to make a distribution is, on its own, neither contrived nor abnormal. It would not therefore be reasonable to expect an informed observer to conclude that condition 2 was met.

Arrangements which may not result in a reduced inheritance tax liability, but which cap the value subject to inheritance tax

Example 14: Gift and Loan Trusts/Loan Trusts

Gift and loan trusts involve the creation of a trust by a person by way of gift, followed by the person making an interest free loan to the trustees which is repayable on demand. The settlor is excluded from benefiting from the trust. Loan trusts are similar except that the trust is established by the granting of the interest free loan without the separate initial gift. The trustees invest the borrowed money. The person may or may not require repayment of some or all of the loan in their lifetime. Any part of the loan which has not been repaid by the person’s death is included within their estate.

Condition 1 The person’s estate is not reduced by the granting of the loan, so condition 1(d) is not met. The arrangement does not meet any of conditions 1(a) to (c). The hoped for inheritance tax saving arises only if the value of the investment rises, but if it falls no inheritance tax saving is achieved.


Example 15: Loans to companies or other entities from which the lender cannot benefit

Condition 1 The granting of a loan which is repayable on demand, or on which a commercial rate of interest is charged, does not reduce the value of the lender’s estate, so condition 1(d) is not met. The granting of such a loan, without any further steps, would not meet any of conditions 1(a) to (c) either.


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Examples of arrangements that might be notifiable

Because conditions 1 and 2 have to be evaluated taking all relevant circumstances of those particular arrangements, or that proposal for arrangements, into account, there will be some arrangements and proposals where it is difficult to be definitive about whether they are notifiable. Where arrangements include multiple steps in order to achieve the intended tax advantage however, there becomes an increased likelihood that they may be notifiable, either by reason of the IHT hallmark or because they fall within the confidentiality or premium fee hallmarks.

Example 16: Arrangement to gift shares which qualify for business property relief into trust and subsequently sell the shares back to the transferor

Condition 1 In isolation the transfer of shares qualifying for business property relief into a trust, or the sale of trust assets by the trustees, would not meet condition 1. Where arrangements are entered into with the intention that all of these steps take place, the arrangements have the effect of placing cash into a relevant property trust, but without incurring a relevant property entry charge. As one of the main purposes of these arrangements is to reduce or avoid a relevant property entry charge it would be reasonable to expect an informed observer to conclude that condition 1(a) is met.

This can be contrasted to a situation where, for example, family company shares are transferred into trust for succession planning purposes, at which time there is no intention of the trustees selling those shares. If the trustees later took an independent decision to sell the shares it is unlikely that an informed observer would conclude these separate steps form part of a single overall arrangement, or to conclude that condition 1(a) was met.

Condition 2 It would not normally be possible to transfer cash into a relevant property trust without incurring a relevant property entry charge, which is what has been achieved. To achieve this outcome and to gain this tax advantage, contrived steps are necessary, that is the transfer or shares qualifying for relief followed by their sale back to the transferor rather than the simple transfer of cash which would be the non-contrived way of achieving the same result. Without these contrived steps the tax advantage would not arise. It would therefore be reasonable to expect an informed observer to conclude, considering the arrangements as a whole, that condition 2 was met.

Examples of notifiable arrangements

Where new proposals for arrangements involve contrived or abnormal steps in order to obtain the inheritance tax advantages set out in condition 1 these proposals will be notifiable.

As explained in the introduction, the ‘grandfathering’ provisions in the 2011 regulations cease to apply from 1 April 2018. This means that arrangements which would have previously been excepted from disclosure will be notifiable if the two conditions in the new hallmark are met.

Example 17: Creation of a reversionary lease

A person owning a freehold grants a lease to a trust or to their children. The lease starts in 21 years’ time, longer than the person expects to survive. The person continues to live in the property until the sub-lease begins.

Condition 1 The arrangements avoid or reduce a charge to inheritance tax arising from the application of the gift with reservation of benefit rules. The person continues to benefit from the property, but the whole value of the property is no longer in the

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estate. If, in addition, no charge arises under Schedule 15 Finance Act 2004, it would be reasonable to expect an informed observer to conclude that this arrangement meets condition 1(c).

Condition 2 The creation of a lease which only takes effect several years in the future and which in the meantime allows the owner of the property to continue in occupation at no cost is a contrived and/or abnormal step. The tax advantage would not be achieved without this contrived or abnormal step. It is therefore reasonable to expect an informed observer to conclude that this arrangement meets condition 2 and is notifiable under this hallmark.

Example 18: Employee benefit trusts (EBTs)

A person owns an investment company with two part-time employees. The directors are that person and his two children. He is the sole shareholder and wishes to transfer the company to his children on his death. He creates an employee benefit trust and settles the shares on that trust. The trust excludes him and his children while he is alive and satisfies section 86 IHTA. His children can benefit after his death.

Condition 1 The arrangements result in a reduction in the value of the person’s estate which does not give rise to a chargeable transfer or a potentially exempt transfer. It is reasonable to expect an informed observer to conclude that obtaining this tax advantage was the main purpose, or one of the main purposes, of these arrangements and therefore that condition 1(d) is met.

Condition 2 The use of an EBT in these circumstances is a contrived step. The purpose is to transfer the company shares to the children, but the tax advantage is obtained by using an EBT to achieve that outcome. The tax advantage could not be achieved without this contrived step. It is therefore reasonable to expect an informed observer to conclude that condition 2 is met and this arrangement is notifiable under this hallmark.

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