HMRC defeats inheritance tax home loan schemeby
An attempt to reduce inheritance tax by using a home loan scheme came up against a brick wall when taken to the first tier tribunal.
The case of the Executors of Mrs LV Elborne (and others) vs HMRC (TC08863) in July 2023 concerns a variation on the theme of using a home loan scheme to reduce the value of an estate for inheritance tax (IHT). HMRC has a reasonably successful record on defeating such schemes on appeal, and although the taxpayers won all but one of the arguments here, HMRC has again prevailed.
The facts can be shown in the following diagram.
IIP = interest in possession
The executors sought to argue that the value of the property was chargeable in Mrs Elborne’s estate due to her life interest (this being a pre-2006 settlement), as reduced by the value of the debt outstanding. The loan note had been gifted more than seven years prior to her death, and thus was not chargeable in her estate.
Arguing several alternatives (using what might be labelled the “kitchen sink” approach), HMRC sought to charge both the value of the property at date of death and the value of the loan note as a debt owed to Mrs Elborne’s estate. As a secondary issue, HMRC was prevented from introducing various arguments that had not been raised prior to the hearing.
In a lengthy judgment, the first tier tribunal (FTT) determined on three separate issues.
1. Validity of the sale agreement
Despite HMRC demonstrating that the sale had never been completed, and indeed Mrs Elborne’s will purported to determine how the property would be shared among her children, the FTT concluded that she had merely indicated her wishes. Thus, a valid and enforceable contract for consideration ensued.
2. Validity of the scheme documents
On the facts, the documentation could not possibly have been signed and executed on the dates stated, but the FTT decided that the true legal effect of the scheme documents was in accordance with their form giving rise to the rights and obligations set out in them.
3. Overall effect of the transactions
Precedent clearly demonstrates that when the purchase price was paid in full on the execution of the sale agreement, beneficial ownership passed to the trustees of the IIP, and did not continue to reside in Mrs Elborne at the date of her death. Thus, the beneficial interest could not pass under her will. Albeit the executors had mistakenly sold the property following her death, they received the proceeds under a constructive trust for the benefit of the IIP.
IHTA 1984 Section 163 – restriction on freedom to dispose
IHTA 1984 Section 102A – gifts with reservation of benefit (GWROBs) involving an interest in land
The FTT rejected HMRC’s argument on these points. They were irrelevant as Mrs Elborne did not own the property at the date of her death.
IHTA 1984 Section 102 – continued occupation was a GWROB
This argument was rejected on the basis that Mrs Elborne’s right to continue to occupy the property arose under the IIP.
IHTA 1984 Section 49 – the loan note did not effect a reduction in the value of the IIP
Although the events had not concluded as originally intended, the loan note had created a liability in the hands of the trustees, which had correctly been taken into account in valuing the trust at the date of death.
IHTA 1984 Section 103 – debt incurred issue
HMRC was finally successful in submitting that the value of the loan note issued by the trustees to Mrs Elborne should be abated by the full value of the consideration provided by her, in other words the value of her home. Thus, the value of the IIP at the date of death, was the value of the property, less nil.
Potential double counting?
The FTT agreed that in principle there is nothing to prevent the value of the loan note being abated to nil in valuing the IIP, but remaining an amount due to the deceased. According to HMRC, under the “associated operations” rules, the action of the trustees of the family trust in not seeking to demand repayment of the loan note then gave rise to a gift with reservation of benefit in not being enjoyed to the exclusion, or virtually the entire exclusion of Mrs Elborne.
Fortunately for the executors of Mrs Elborne’s estate, the FTT determined that since the benefit received by Mrs Elborne (by virtue of the gift of the note and the right to occupy the property for the rest of her life) existed:
- before the gift of the note was made, and
- before any of the associated operations in relation to the gift occurred, and
- did not impact upon the possession and enjoyment of the note by the trustees,
there was no GWROB in the loan note.
Always accepting that FTT decisions do not set precedent, as taxpayers using such schemes continue to die some years after implementation, trustees and executors should carefully consider how disclosures should be made on IHT returns.
You might also be interested in
Mark Ward qualified with a large firm in 1989, having previously worked in the tax departments of a small and a medium size firm. He has been lecturing on a wide variety of tax matters for 30 years to qualified practitioners and industry specialists in the UK and overseas.