The Court of Appeal has ruled that the use of a controversial ‘home loan’ scheme successfully removed the obligation to pay inheritance tax on a property.
The scheme was arranged by Leslie Elborne in 2003 in an attempt to remove the value of her home, of which she was the freehold owner, from her taxable estate while enabling her to continue to live there rent-free until her death, which occured in January 2011.
The so-called home loan scheme, arranged by the family solicitor, involved the sale of the property by Mrs Elborne for its market value to the trustees of a settlement created by her and in which she had a beneficial life interest in possession, in exchange for a promissory note of equivalent value issued by the trustees of the life settlement.
Mrs Elborne assigned the promissory note by way of gift to the trustees of a second new settlement created by her, under which she was excluded from all benefit but in which her three children had beneficial interests in possession.
She was to remain in residence in the property rent-free until her death, which it was hoped would – and did – occur more than seven years after the assignment of the note.
Under the arrangement, on Mrs Elborne’s death the property would be deemed to form part of her estate because of her interest in possession, but its value would be matched by a corresponding deduction for the outstanding liability due under the promissory note.
The potentially exempt transfer (PET) under section 3A of the Inheritance Tax Act 1984, made when the promissory note was assigned to the trustees, would be exempt from charge because she had survived the making of the PET by seven years.
The arrangement was challenged by HMRC following Mrs Elborne’s death, reflected in notices of determination issued to the executors and trustees of the settlements in February 2017 under section 221 of IHTA 1984.
The executors and trustees appealed to the Tax Chamber of the First-tier Tribunal, which rejected all but one of HMRC’s grounds of opposition, but dismissed the appeal on that one ground.
Both sides then appealed to the Tax and Chancery Chamber of the Upper Tribunal, which, in February 2025, allowed the appeal of the executors and trustees and dismissed HMRC’s cross-appeal on the previously rejected grounds. HMRC then appealed to the Court of Appeal.
In the decision published in July following an April hearing, Sir Launcelot Henderson acknowledged he had reached “an unexpected conclusion”- with which Lady Justice Andrews and Lady Justice Asplin agreed – but said Mrs Elborne and her advisers had “succeeded in implementing an ingenious scheme”.
Although subsequent legislation, including the requirement to disclose tax avoidance schemes to HMRC and the general anti-abuse rule, mean home loans scheme are no longer valid, the decision could impact families whose agreements pre-date the legislation.
HMRC said it had noted the decision and was considering next steps.
