Home loan (or double trust schemes) were popular during the 1990s and early 2000s. There were a number of variations to the scheme, all of which were designed to avoid an inheritance tax charge on the family home. Following the introduction of the disclosure of tax avoidance schemes (DOTAS) regulations introduced in the 2004 Finance Act, the schemes are no longer used. However, many of them remain in place. This scheme operated as follows:
- Leslie Elborne (the Deceased) sold her house (the Old Rectory) to a trust in which she had an interest in possession in exchange for a £1.8 million promissory note.
- The Deceased gave this promissory note to a second trust in which she was excluded from benefit. Each of her children had interests in possession in this second trust.
- The scheme purported to operate with the house forming part of her estate (because of the Deceased's interest in the original settlement) but there would a corresponding deduction for the outstanding liability due under the promissory note.
- The gift to the original settlement would have been a potentially exempt transfer at the time (which the Deceased survived by seven years and it therefore fell out of charge).
- The Deceased remained living in the property until her death and the executors submitted the inheritance tax return to HMRC by claiming full inheritance tax relief. HMRC raised an enquiry into the return and denied the relief.
- The executors appealed to the First-Tier Tribunal and lost. After winning the appeal at the Upper Tribunal, HMRC appealed to the Court of Appeal.
HMRC's appeal failed as the Court of Appeal confirmed the scheme succeeded as it "took advantage of the now historic treatment for IHT purposes of interests in possession in family settlements".
One of the key questions which the court considered was whether the debt under the promissory note was a debt incurred by the Deceased (within the meaning of section 103 Finance Act 1986). The court ruled that the debt was not incurred by the Deceased but was instead incurred by the trustees of the first life interest Settlement (in that capacity, despite the Deceased being one of the trustees). The court also dismissed the application of the gift with reservation of benefit rules found in section 102 FA 1986.
It remains to be seen whether HMRC attempt to appeal the decision to the Supreme Court. It is also worth noting that there are several variants on the "home loan" scheme and just because HMRC have lost this appeal does not mean that other schemes concerning tax planning and the family home will not be successfully challenged in the future.
Many of these schemes are still in place even if they cannot be implemented successfully now (due to the introduction of DOTAS and GAAR and decisions in Ramsey and Rossendale). It is almost certain that further cases will emerge as executors try to claim the inheritance tax relief. Any individuals who were involved in such schemes would be advised to review their affairs before they are challenged by HMRC and take professional advice at an early stage.