Double Trouble: Home Loan Double Trust IHT Scheme Failure
The efficacy of home loan double trust schemes have been dealt a blow by the tax tribunal in what might be the first time the tax tribunal has considered their treatment. Such schemes were in vogue some years ago as a tool to minimise inheritance tax liabilities on death, but few schemes have been established since 1 December 2003, following the introduction of SDLT
The late Geraldine Pride was the principal beneficiary of a family trust established in 2022. It was a home loan double trust designed for the purpose of ring fencing assets from the estate to mitigate liability for IHT.
In simple terms, a double trust scheme is used by an individual to place the value of their home outside of their estate. It involves the settlor selling property at market value to one trust (of which the settlor is beneficiary); the consideration for the property is treated as a debt; and the benefit of the debt given to the other trust for the benefit typically of the settlor’s children.
Under the Inheritance Act 1984, when the value of the deceased’s estate is calculated for IHT purposes, their liabilities at the date of death are taken into account - except as otherwise provided (s5(3)). Under s5(5), a liability “incurred by a transferor shall be taken into account only to the extent that it was incurred for a consideration in money or money’s worth”.
What’s the background?
Geraldine had transferred high-value properties to a trust, the trustees of which invested the proceeds of the trust property sale in investment bonds. Loan notes valued at £5m were then created, indemnifying the property trust trustees, and were a liability of the trust.
Geraldine died in 2016. At that time, she was also entitled under the trust terms to the rental income from a flat in Poole. HMRC issued a notice of determination for around £1.7m and the executor/trustee appealed.
HMRC’s view was that the loan notes consisted of an encumbrance created by Geraldine’s assignment of her interest in two properties to the trustees of the property trust – and were not deductible from her estate for IHT purposes.
The FTT agreed with HMRC. It ruled that the loan notes were a liability of the estate under the Inheritance Act – but subject to s5(3). It then concluded that the debt incurred by the property trust was incurred by Geraldine – the consideration given for the loan notes was provided wholly by her also (and not for money or money’s worth).
Therefore, the extent of the abatement of the liability under s103 Finance Act represented by the loan notes should be 100%. The scheme had failed entirely.
Key takeaway
HMRC has previously suggested that taxpayers may want to consider unwinding a home loan or double trust scheme already entered into. This subsequent ruling should prompt trustees and property owners to review property trusts to determine if it is likely to fall foul of the rules.
Specialist advice from expert tax lawyers should be sought.
1Pride v HMRC [2023] UKFTT 316 (TC
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