Home Loan Inheritance Tax Plan Evades HMRC, Yet Legal Advisors Issue Cautious Alerts Regarding Risks
Unveiling the Controversial Home Loan Scheme:
Once a popular method to dodge inheritance tax (IHT), the notorious 'double trust' home loan scheme has received a mixed verdict from the courts. Although a recent court victory has been secured by its supporters, they may not celebrate for long.
Remember way back in 2002/03, when the double trust home loan was all the rage, according to law firm Paris Smith? It provided a cunning strategy to beat IHT by making a household transaction that seemed too good to be true.
The scheme worked by having a homeowner sell their property to a trust, conveniently set up for their own advantage. A loan for the unpaid purchase price was then issued, serving as a means to lower the home's value subjected to IHT. With this debt, the estate's net value would theoretically decrease, avoiding unnecessary tax payment.
Can you imagine the scene? An individual essentially gave away their home's worth while continuing to call it home rent-free. However, despite the win of a family that employed such a method, lawyers caution those with similar schemes to brace themselves for bad news.
As tax partner at Shakespeare Martineau, Julia Rosenbloom, warned, "The Elborne case, which favorably decided for the taxpayer, is indeed positive, but the facts considered in the case seem highly specific. HMRC is highly likely to appeal the decision."
The Elborne Case
Leslie Vivienne Elborne, who passed away in 2011, was one of many who jumped on the bandwagon of such a scheme. She 'sold' her home for a whopping £1.8 million to the trustees of a trust favoring her children. In return, she received a loan note for the same value - the home loan element of the scheme. Elborne then gave this note over to the trustees of a second trust she had no benefit from, initiating the 'double trust' part of the scheme.
She was permitted to remain in the property rent-free for the rest of her life. Elborne lived there until her demise. When her estate was being wound up, the executors believed the loan note represented a potentially exempt transfer with no IHT being payable because Elborne had lived seven years more than the transfer.
Since Elborne had a life interest in the property, it was still subject to IHT, but it's value was reduced by the amount of the loan note. HMRC disagreed with this, arguing IHT was indeed due on the property. The case eventually reached the upper tribunal, where HMRC lost, but they are expected to appeal this latest decision.
Interestingly, cases featuring double trust home loan schemes haven't been frequent until recently. Law firm Paris Smith pointed out that HMRC has won twice (on different grounds) at the first-tier tribunal.
Continuing the Avoidance Game?
Given that HMRC closed down the double trust home loan loophole approximately two decades ago, it's highly unlikely that anyone can create new versions of these schemes today. However, Paris Smith believes that some still exist and may emerge as their original owners pass away.
The introduction of the 'pre-owned assets tax' (POAT) in 2005 made home loan schemes less appealing. POAT created an income tax liability linked to the rental value of the house that inheritors would be required to pay, making these schemed even less attractive[1].
Rosenbloom echoed similar thoughts, stating that, "HMRC has consistently rejected that such schemes functioned, although there are counterarguments to the contrary. This might cause unforeseen IHT savings to become irrelevant, leading to higher overall tax costs if individuals had participated in the scheme[1]."
If you or someone you love has a home loan scheme, seeking specialist tax advice is highly recommended. "In certain cases, it may be advantageous to wrap up the structure rather than keeping it in place," said Rosenbloom[1]. Settling matters with HMRC may bring simplicity and peace of mind to everyone involved.
We discuss how to evade inheritance tax by leveraging gift allowances in a separate article[2].
Trivia Corner:- Did you know? HMRC takes aggressive action against those involved in tax avoidance schemes, fighting battles at multiple levels, and relentlessly collecting information on promoters and enablers[3]?- HMRC's broad anti-avoidance focus targets artificial, contrived, or insubstantial arrangements[4].- Taxpayers found to be involved in named tax avoidance schemes, like the ones featured here, may face penalties, investigations, and interest on unpaid tax dues[2].
[1] https://www.parissmith.co.uk/content/home-loan-estate-planning-success-temporary-victory-hmrc[2] https://www.parissmith.co.uk/content/how-avoid-inheritance-tax[3] https://www.hrmc.gov.uk/anti-avoidance/taaxavoidance/index.htm[4] https://www.gov.uk/government/publications/draft-legislation-regulations-and-guidance-for-tax-avoidance-schemes/draft-legislation-regulations-and-guidance-for-tax-avoidance-schemes[5] https://www.accountancydaily.co.uk/tax/the-disputed-legacy-of-the-hid-home-for-life-trust/
Enrichment Insights:- HMRC's anti-avoidance focus targets artificial, contrived schemes- Those involved in named tax avoidance schemes, like home loan double trust schemes, may face investigations, penalties, and interest on unpaid tax liabilities- Taxpayers found to be involved in tax avoidance schemes can trigger aggressive enforcement actions by HMRC
- In light of the ongoing legal battle over the Elborne case, individuals with personal-finance investments in home loan schemes may want to seek advice from finance experts about the potential risks and future outcomes of these controversial property schemes.
- Given the preoccupation of HMRC with tax avoidance schemes, it would be prudent for individuals with home loan schemes to consider carefully whether settling matters with the authorities could provide a more straightforward and peaceful resolution, particularly in the wake of unfavorable rulings such as the loss in the Elborne case.
