A “home loan” scheme designed to avoid inheritance tax (IHT) saw the executors of the estate narrowly miss incurring a double IHT charge following a recent challenge by HM Revenue & Customs.
The deceased, Leslie Elborne, sold her home to a trust in 2003 and received a loan note, continuing to live in the home and covering the costs. She gave the trustees of the trust the loan note, then died in 2011, more than seven years later.
The executors of Leslie’s estate claimed for an IHT reduction on this basis, suggesting the IHT value of the estate – which included her home due to her interest in possession in the life settlement – should be reduced by the value of her liability under the loan note, a similar value to that of the home itself at the time of the scheme’s implementation.
HMRC disagreed, leading to the executors appealing to the First-tier Tax Tribunal (FTT), where it was held that the liability under the note should be nil under s. 102 of the Finance Act 1986 given it consisted of an incumbrance created by a gift of the property to the trustees. HMRC also suggested the gift itself was subject to a reservation under the same s. 103 of the Act.
The issues created by this were explored by the FTT at [242], where it was suggested that, should they determine that the Respondents succeeded on both the s. 102 and s. 102 issues, the result would be an increase to the value of Leslie’s estate by an amount equal to twice the value of the liability under the note:
“Once because the liability under the note fell to be abated to nil under s .103 and then again because the note fell to be treated as being property to which Mrs Elborne was beneficially entitled immediately before her death under s. 102.”
They added that “it is not apparent from the terms of s. 104 of the FA 1986 and the regulations made thereunder that there would be any relief from the double charge to tax which would then arise.
Whilst that does not mean, in and of itself, that the Appellants should succeed in relation to the s. 102 note issue, it would be a surprising result, and doubtless one that would be quite unwelcome to the Appellants.”
They continued at [243]:
“There would be something odd in both treating the note as an asset of the estate pursuant to s. 102 whilst at the same time abating the liability under the note to nil pursuant to s. 103 on the ground that the liability was a debt incurred by Mrs Elborne.”
However, they reasoned:
“Since the benefit received by Leslie by virtue of the gift of the note and the transactions which were ‘associated operations’ in relation to the gift – namely, the right to occupy the property for the rest of her life – existed before the gift of the note was made and before any of the ‘associated operations’ in relation to the gift occurred and did not impact upon the possession and enjoyment of the note by the trustees, s. 102 can have no effect in relation to the note.”
It was therefore held that the s. 102 note should be determined in favour of the Appellants. However, the scheme failed to avoid any IHT after all, as the Respondents succeeded in relation to the s. 103 debt incurred issue:
“In valuing Mrs Elborne’s estate immediately before her death, the liability under the note should be abated by an amount equal to the value of the Property on the date when beneficial ownership of the Property passed to the trustees of the Life Settlement pursuant to the Sale Agreement. That means that the value of that liability should be abated to nil.”
The Executors of Elborne & Ors v Revenue And Customs [2023] UKFTT 626 (TC) (14 July 2023)
