It is difficult to think of a scheme more strongly disliked by HM Revenue and Customs (HMRC) than the ‘home loan’ (sometimes referred to as the ‘IOU’) scheme for inheritance tax (IHT) purposes.
What was it?
The home loan scheme reached the peak of its popularity in the late 1990s and early 2000s. Broadly, the scheme typically involved the homeowner (e.g. Mr X) selling his residence to a trust (i.e. a life interest trust for him) for full market value. The trustees would give Mr X an IOU for the purchase price. Mr X would give the IOU to a life interest trust for (say) his adult children. Mr X would continue occupying the house by reason of his life interest under the first trust.
The IHT consequences were intended to be that on Mr X’s death his life interest trust fund formed part of his estate, but the value of the property would be largely or wholly covered by the IOU to the trustees; and the transfer of the debt to the second trust was a potentially exempt transfer, so that on survival for at least seven years the gift was not charged to IHT.
HMRC says ‘no’!
HMRC has sought to challenge home loan schemes on various grounds, including under the ‘gifts with reservation’ anti-avoidance rules, the ‘pre-owned assets tax’ income tax provisions, and/or on general anti-avoidance (‘Ramsay’) principles (see HMRC’s Inheritance Tax manual at IHTM44103-IHTM44106).
Home loan schemes became less popular following the introduction of stamp duty land tax in 2003. However, it took many years for the first case on a scheme to reach the tax tribunal.
Not according to plan
In Shelford & Ors v Revenue and Customs  UKFTT 53 (TC), an individual (JSH) participated in a home loan scheme in March 2002. JSH established a life interest trust. JSH then entered into an agreement with the trustees for the sale of JSH’s house for £1,400,000. JSH also entered into a loan agreement with the trustees for JSH to lend the trustees £1,400,000. In addition, JSH assigned his interest in the debt under the loan agreement to the children. JSH continued to reside (rent-free) at the house until his death in September 2013. HMRC challenged the arrangements.
The First-tier Tribunal found that the sale agreement did not satisfy property law requirements, so the sale agreement for the house (and purported loan and deed of assignment) were void. Consequently, the house (then worth £2.85 million) formed part of JSH’s estate on death. The appellant’s appeal was dismissed.
The tribunal went on to consider the IHT position if it was wrong and the agreement for the sale of the house to the trustees was not void. The tribunal concluded that the house would have formed part of JSH’s estate on death. Furthermore, as JSH was beneficially entitled to an interest in possession of the settled property, its value should also be included in the IHT computation on JSH’s death.
The Shelford case was decided on a property law point on the particular facts. The IHT issues were not resolved, so further cases seem likely. However, the moral of the Shelford case generally applies to legitimate tax planning; make sure the arrangements are legally effective and implemented correctly.
The above article was first published in Property Tax Insider (June 2020) (www.taxinsider.co.uk).