Home Loan Schemes – An update

 In Tax

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home loan schemes

After a year’s delay, HMRC has finally updated its guidance on home loan schemes.  HMRC’s position is now that the Ramsay principle applies so that such arrangements are and always have been entirely ineffective for the purposes of IHT mitigation.  This article reviews and assesses the merits of HMRC’s new position, as well as considering what taxpayers who have such arrangements in place should do now.

What are home loan schemes?

For prospective planning purposes, home loan schemes ceased to attractive in December 2003, with the introduction of SDLT and the pre-owned assets (‘POA’) charge to income tax.  Before then, they were widely marketed; the previous Government estimated that 30,000 homeowners had entered into such arrangements.  While some taxpayers will have decided to unravel the planning altogether, many chose to retain the arrangement, opting to pay the POA charge as the price of the intended IHT saving.

The (interchangeable) labels ‘home loan’ or ‘double trust’ scheme describe arrangements which share these features:

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  1. First, the taxpayer created a trust (‘the Property Trust’) in which he had a qualifying interest in possession (this is all before FA 2006) with, say, his children entitled in remainder.
  1. The taxpayer then sold the house to the trustees of the Property Trust.  The trustees do not pay anything to the taxpayer, but instead leave a debt outstanding.  So the trustees now owe a debt to the taxpayer.  The terms of that debt differed widely – and there is a significant distinction, considered below, between those arrangements where the debt is repayable immediately and those where it is repayable only on the taxpayer’s death.
  1. The taxpayer finally settled the benefit of the debt onto a second trust (‘the Debt Trust’).  His children are the beneficiaries of the trust.  The gift of the debt to the trust is intended to be a PET.

The home remains within the taxpayer’s estate for IHT purposes as it is an asset of the Property Trust, in which the taxpayer has a qualifying interest in possession.  But the intention is that his estate is reduced by the value of the debt.

Debt repayable immediately

HMRC’s analysis distinguishes between those arrangements where the debt owed by the Property Trust trustees is repayable immediately and those in which the terms of the debt are such that it is not repayable until, say, after the taxpayer’s death.  In the former case, HMRC’s position has long been (probably correctly) that there is a reservation of benefit in the debt, so the taxpayer’s estate on death is not reduced for IHT purposes by the value of the debt given away to the Debt Trust.

The revised guidance issued by HMRC in October 2011 sets out HMRC’s argument (with greater clarity than the previous version of the guidance did) in the following terms:

‘HMRC’s view is that the loan will be property subject to a reservation until such time as the trustees call in the loan. The reason for this is that if [the Debt Trust] had called in the loan, [the Property Trust] would have been forced either to sell the home to repay the debt, or to seek finance from elsewhere. If the house were sold, then the vendor(s) would have been unable to occupy it under the terms of [the Property Trust]. In order to avoid the need for a sale, [the Property Trust] would have had to find a third party willing to lend 100 per cent of the value of the property on the basis of a covenant by the trustees, and security over the house. Even if such borrowing could be obtained, which must be extremely doubtful, it would be prohibitively expensive. [The Property Trust] could only justify taking on such borrowing if they were financed by the vendor(s) (the life tenants) who would be benefiting from the property by residing in it. On the foregoing basis it is considered that the trustees of [the Debt Trust], in not calling in the loan, have enabled the vendor(s) to retain a significant benefit in it, and therefore that the debt was not enjoyed to the entire exclusion of any benefit to the vendor(s) by contract or otherwise.’

Debt repayable on taxpayer’s death

The above analysis cannot be applied where the terms of the loan are such that the debt is not repayable until after the taxpayer’s death.  In those circumstances, it is simply not open to the trustees of the Debt Trust to seek to call in the loan.  HMRC had previously indicated that it accepted that there was no gift with reservation in such circumstances.  In October 2010 it changed its advice, stating that these schemes too involved a gift with reservation and promising to publish revised guidance ‘shortly’.

It was not until October 2011 that HMRC finally published its revised guidance. The relevant part of the revised guidance states:

‘[It] is now HMRC’s view that as the steps taken under the schemes are a pre-ordained series of transactions a realistic view should be taken of what the transactions achieve, as a composite whole, when considering how the law applies. […]  The composite transaction has the effect that the vendor has made a ‘gift’ of the property concerned for the purposes of s 102 FA 1986 and has continued to live there. The property is therefore subject to a reservation of benefit’

Is HMRC’s analysis correct?  The new guidance suggests that HMRC considers there to be a reservation of benefit in the property, not in the debt.  Why does that matter?  The taxpayer already has a qualifying interest in possession in the property anyhow.  Presumably, HMRC must consider that the effect of the ‘composite transaction’ is such that the debt does not reduce the value of the property.  But, despite the long wait for the guidance to be revised, it does not make this crucial step in the reasoning explicit.

The Supreme Court has reaffirmed in Tower MCashback LLP v. RCC [2011] UKSC 19, [2011] 2 WLR 1131 that the Ramsay doctrine is a principle of statutory construction.  It is not wholly or primarily about treating sets of pre-ordained steps as a single transaction.  It is difficult to see how, even on a purposive construction of s 102, there is anything other than a disposal of a property into an interest in possession trust and a gift of a debt to another trust.  One might also wonder quite what scope there is for applying a purposive construction to provisions as heavily laden with technicalities as the reservation of benefit mini-code.

What should taxpayers do now?

It is confirmed in HMRC’s revised guidance that there is litigation pending which will consider these arguments.

What should the taxpayer do in the meantime? The short answer is likely to be nothing.

HMRC had previously argued that FA 1986, s 103 applied so as the disallow the deduction of the debt for IHT purposes on the taxpayer’s death.  HMRC had originally indicated that if this argument succeeded, the arrangement would be ineffective for IHT purposes, but the POA charge would still apply.  The new guidance indicates that HMRC has abandoned this argument.

HMRC has now confirmed that, if its analysis is correct, the POA charge will not apply.  If taxpayers continue to pay the POA change until the pending litigation is resolved, HMRC now states that – if its view prevails – it will repay with interest all tax that has been paid under the POA charge, irrespective of any time limit which would otherwise apply.

What if the taxpayer has died?  In that case, his personal representatives will need to take a view on how likely HMRC’s attack is to succeed.  They might, if particularly cautious, choose to make a payment on account.  HMRC says that where estates have been settled on its previous view of the law, neither IHT nor the POA charge payments will be reopened.


So, despite HMRC’s somewhat muddled approach to home loan schemes over the last year or so, the new guidance does resolve the immediate uncertainty that taxpayers faced about whether to unwind the schemes. It would not be surprising if the end result is that HMRC’s pre-2010 position was correct all along. This would mean that those schemes where the debt is repayable immediately are not effective, but those whether the debt is repayable only on death do work, after all.

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