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Tony Wickenden: Do clients’ IHT set-ups pass new HMRC test?

Tony WickendenThose that do not comply with the new requirements risk incurring substantial penalties

When it comes to tax matters, you may not be surprised to learn I am especially interested in HM Revenue & Customs’ and the Treasury’s strategy to stamp out aggressive avoidance that defeats the intent of Parliament. A key part of that strategy is to remove demand for said avoidance.

These allow it to issue accelerated payment notices, which, in turn, lead to improved cash flow for it.

Recently, official attention has turned to Dotas in the context of inheritance tax and, as a result, a new test of reportability has been launched.

Tony Wickenden: Is IHT in line for a shake up?

These allow it to issue accelerated payment notices, which, in turn, lead to improved cash flow for it.

Recently, official attention has turned to Dotas in the context of inheritance tax and, as a result, a new test of reportability has been launched.

New rules

Helpful updated guidance on the new IHT hallmark, which came into effect on 1 April, is now available. This will be incorporated into HMRC’s guidance on the Dotas regime and will replace that previously in chapters 12 and 13.

The revised guidance:

  • Gives some background to the changes in the IHT hallmark
  • Describes the new hallmark and explains how it works
  • Provides details of the two conditions that have to be met for an arrangement to be notifiable
  • Explains how the established practice exception applies
  • Gives examples of arrangements that are not notifiable, might be notifiable and are notifiable.

Here, I want to examine this new hallmark in more detail. Before doing so, however, it is important to note that, even if the conditions for non-notification under this new hallmark are satisfied, the scheme or proposal must also be tested against the premium fee and confidentiality hallmarks to assess whether notification is necessary.

Thus, there are three hallmarks to consider in relation to IHT arrangements and Dotas.

The Dotas regulations are an important weapon available to HMRC in its fight against tax avoidance schemes. In essence, if a scheme falls foul of certain conditions, any person involved in the promotion of the scheme must disclose details of it to HMRC. If they do not comply with this requirement, they risk incurring substantial penalties.

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Under the revised regulations, 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”.

That the criterion is an “informed observer” is helpful, as it provides the context in which the conditions are to be judged. The “informed observer” is to be contrasted with an “uninformed observer” but is not an expert or a tax practitioner.

So let’s have a look at the conditions of the new hallmark.
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 pre-owned assets tax 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.

The HMRC guidance on this new hallmark is helpful in determining whether the second condition has been satisfied. Reassuringly, it states that the use of trusts is not in itself contrived and making a loan to a trust would also not be abnormal to an informed observer.

Notifiable or not?

It has also given a range of examples of arrangements not notifiable for the purpose of the hallmark. These are as follows:

  1. Ordinary gifts
  2. Regular gifts out of income
  3. Repeatable nil rate band gifts
  4. Lifetime transfers to a bare trust
  5. Disclaimers and deeds of variation
  6. Exempt gifts to spouse or charity in a will
  7. Disclaiming a benefit under a will
  8. Investing in shares that qualify for business relief
  9. Gift of land with continued donor use paying a full market rent
  10. Gift of an undivided share of property subsequently used by a donor and donee
  11. A non-resident non-dom transferring money from a UK bank account to a US dollar account so that it does not represent UK-sited property
  12. Non-dom transferring non-UK situs property into a trust before becoming deemed domiciled under the new domicile rules
  13. Making a distribution from a discretionary trust before the 10-year anniversary
  14. Establishing a gift and loan/loan trust
  15. Loans to companies and other entities from which the lender cannot benefit.

HMRC also quotes a couple of examples of where the arrangements would be notifiable:

  1. Creation of a reversionary lease
  2. Creating an employee benefit trust that excludes the settlor and their children (satisfying section 86 IHTA 1984) but under which the settlor’s children can benefit after their death.

As well as the non-notifiable arrangements above, HMRC has also set out an “established practice” exception. Under this rule, any scheme promoted, used or proposal made on or after 1 April will be excepted and therefore not notifiable only if they:

  • Implement a proposal which has been implemented by related arrangements, and
  • Are substantially the same as the related arrangements.

Related arrangements are defined as arrangements which:

  • Were entered into before 1 April, and
  • At the time they were entered into, accorded with established practice of which HMRC has indicated its acceptance.

Being implemented in “the same form” as a “HMRC acceptable” arrangement that was implemented before 1 April is important.

Reassurance

It is also worth remembering again that, even if the scheme is not notifiable by virtue of being excepted, or just not containing contrived steps, it can still be notifiable if it satisfies either the premium fee or confidentiality hallmarks – neither of which ought to be relevant to the retail IHT solutions deployed within the financial series sector.

While gift trusts and loan trusts were both given as examples of schemes that would satisfy the non-notifiable criteria, discounted gift trusts were not.

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That said, they are referenced as an example in relation to the established practice exception. In the guidance, HMRC states that if an insurance company offered an arrangement under what was an acceptable format in accordance with HMRC practice before 1 April, and individuals set up the same arrangements on or after 1 April, the proposal would be within the established practice exception and not notifiable.

However, if the insurance company decided it wants to make changes to the elements or to the steps required to achieve the intended tax advantage, this would be a new proposal.

Even though it may be “substantially the same”, this new proposal and any arrangement that implements it are not excepted and must be tested against the new IHT hallmark.

Changes to a proposal or scheme that do not affect the elements or steps required to achieve the intended tax advantage would not result in this being a new proposal.

The guidance provides welcome reassurance in relation to all of the key IHT and estate planning strategies adopted by advisers. But a word of warning in relation to DGTs – take great care before making any changes to the scheme and its structure given the conditions for the established practice exception.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn

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