Recent decisions affecting double trust or home loan schemes to save IHT
Recently, the courts have been grappling with the correct treatment of one old IHT scheme known as the ‘double trust’ or ‘home loan’ scheme. The scheme was designed to enable a taxpayer to remain in their high value property until death and yet for its value to drop out of charge on death provided the taxpayer survived seven years from setting up the scheme.
The double trust or home loan scheme components
A settlor established two qualifying interest in possession (IIP) trusts before 22 March 2006, the first under which the settlor had a life interest with the remainder going to others such as the settlor’s children. The second trust, under which the settlor was excluded from benefit, provided usually for the settlor’s children for life with remainder to their issue. At the time creating these lifetime trusts would have been potentially exempt transfers (PETs).
The settlor then ‘sold’ his home to the trustees of the first trust for its full market value, but the purchase price was left outstanding in the form of an IOU or loan note which was repayable only after the settlor’s death.
As a next step, the settlor gifted the IOU to the trustees of the second trust. Under the pre-22 March 2006 rules this gift was a PET which would fall out of account after seven years.
FREE monthly newsletter
Wills | Probate | Trusts | Tax | Elderly & Vulnerable Client
- Relevant learning and development opportunities
- News, articles and LawSkills’ services
- Communications which help you find appropriate training in your area
The settlor continued to reside in the house rent-free until his death. As the house was ‘sold’ at market value to the trust there was no gift with reservation of benefit (GROB) and the only gift that the settlor made was that of the IOU to the second trust from which he received no benefit.
This gift would drop out of the charge to IHT once the settlor survived by seven years. The home would form part of the settlor’s estate on death (by virtue of their IIP), but, for IHT purposes, the value of the debt (IOU) was deducted from the value of the home and so IHT was payable only on the net value.
What did HMRC do to try and make this scheme unworkable?
This scheme was in fact one of the main reasons for the introduction of the pre-owned assets tax (POAT) rules in Sch 15 Finance Act 2004.
Sch15 provides for a charge to income tax on benefits received by a former owner of property. The POAT charge applies to individuals who continue to receive benefits from certain types of assets that they once owned after 17 March 1986 but have since disposed of. The first year in which the POAT charge could arise was the tax year 2005/06. If the POAT charge applied, there are provisions which set out how the taxable benefit is to be calculated. Many taxpayers who adopted the home loan scheme were advised to pay the POAT charge.
How are HMRC challenging double trust schemes?
Firstly, HMRC may allege that the arrangement simply did not work. In other words, they allege that there was a GROB all along. If the loan had been repayable on demand, the trustees of the second trust, by not calling in the loan, have enabled the individual to retain a significant benefit in the loan.
If the loan is repayable only after the death of the settlor, HMRC consider, the settlor still obtains a benefit that is referable to the gift. Their view is set out at IHTM44105. They argue that by signing up to a loan which was repayable only after their death, the individual has ensured that their continued occupation of their home cannot be disturbed. So, whilst they no longer own the property, they have prevented the holder of the loan from upsetting their enjoyment of the property. That is a benefit to them and one that arose directly from the terms of the loan that was given away.
Even if the settlor paid a POAT charge, HMRC have said that the mere acceptance of a POAT charge does not prevent them from arguing that there is a GROB charge UNLESS they conducted a lifetime assessment and agreed that the GROB rules were not in issue. Where HMRC’s argument is successful, they will give credit for any amount paid under the POAT charge rules.
Alternatively, HMRC may argue, as they did in Shelford v HMRC  UKFTT 0053 that a home loan scheme could cause the property to be subject to two separate IHT charges – once in the homeowner’s estate and again by virtue of his IIP in the settlement to which it was ‘sold’.
In Shelford the First Tier Tribunal found that the sale agreement between the settlor and the trustees of the IIP trust was void because the documentation did not comply with the requirements of s.2 Law of Property (Miscellaneous Provisions) Act 1989 and so the house formed part of the settlor’s estate on death. This was an error on the practitioner’s part in implementing the scheme.
The FTT Judge also considered what the IHT analysis would be in the event that it was decided on appeal that there was in fact a valid sale of the house to the trustees with delayed completion. He concluded that:
- The house would form part of the deceased’s death estate but his ability to dispose of it freely was restricted by the agreement to sell it to the trustees at a fixed price.
- However, when it came to valuing the property in the settlor’s estate, the restriction was to be ignored under s.163 IHTA 1984. This provides that a restriction is to be ignored on the subsequent transfer of value except to the extent that consideration in money or money’s worth was given for it. The price payable under the agreement could not be deducted as consideration under s.163 because it was not paid until after the settlor’s death and it was not consideration given for the right to acquire the house, it was consideration for the house itself. Moreover, the section requires consideration actually to be given and the trustees gave none until after the settlor’s death. The house was therefore valued at full market value.
- The house also formed part of the settled property which was treated as forming part of the deceased’s taxable death estate under s.49 IHTA 1984 due to his life interest. The trust did have a liability based on the sale price of the house at the time the arrangement was implemented, which the executors were entitled to deduct in calculating the total value of the settled property within the deceased’s estate.
Developments in 2023
In Pride v HMRC  UKFTT 316 HMRC successfully argued that the debt incurred by the trustees was non-deductible under s.103 FA 1986. The tribunal held that for IHT purposes the life tenant was deemed to have created the debt by analogy given the fiction that a life tenant is the beneficial owner of the trust assets for IHT. The FTT considered that this was significant because the debt derived from assets belonging to the life tenant and so was an artificial debt under s.103 FA 1986. As such, it was non-deductible.
This decision has been criticised, on the basis that s.103 requires the consideration to derive from a disposition made by the taxpayer and the transaction involved was a sale rather than a gift.
In Executors of Elborne v HMRC  UKFTT 626 HMRC was again successful in defeating the home loan scheme but failed to persuade the FTT to impose a double IHT charge on the estate as a result of the scheme.
The FTT agreed with HMRC that the liability under the loan should be abated to nil for IHT purposes, not using the s.163 IHTA 1984 argument in Shelford, but under s.103 FA 1986, since the liability was an incumbrance created by the gift of the property to the trustees of the life interest. The FTT struggled, however, to accept HMRC’s other argument that the gift of the property to the trust was in addition a GROB. It would be odd, the FTT felt, to treat the loan as an asset of the estate at the same time as abating the liability under the loan to zero under s.103 on the ground that it was a debt incurred by the deceased.
Therefore, whilst the scheme failed to save any IHT the FTT concluded there was no double charge to IHT as a result of using the scheme.
The use of the double trust or home loan scheme may have incurred the POAT charge for income tax for the taxpayer whilst failing to save the promised IHT on the value of the taxpayer’s home. Although the analysis of why there is no IHT saving varies in Shelford and Elborne the outcome is for now clear that there is no IHT saving but at least no double-counting as was envisaged in Shelford.
The LawSkills Monthly Digest
Subscribe to our comprehensive Monthly Digest for insightful feedback on Wills, Probate, Trusts, Tax and Elderly & Vulnerable client matters
Not complicated to read | Requires no internet searching | Simply an informative pdf emailed to your inbox including practice points & tips
Subscribe now for monthly insightful feedback on key issues.
All for only £120 + VAT per year
(£97.50 for 10+)