Home loan planning unsuccessful

Claire Johnson, Partner in the Private Capital team, reviews the recent case of Elborne v HMRC

The recent case of Elborne v HMRC will be of interest to advisers who act for clients who have put in place a form of inheritance tax planning (IHT) known as the “home loan scheme.”

Mrs Leslie Elborne was advised to enter into the home loan scheme in 2003. Mrs Elborne transferred her property to a trust under which she was entitled to a life interest and was granted in consideration of the transfer a promissory note (the loan note) equivalent to the value of the property.

Mrs Elborne then transferred the loan note to a trust for the benefit of her children and continued to live in the property rent-free. She died more than seven years later. Mrs Elborne’s executors argued that the assignment of the loan note was a successful potentially exempt transfer. They also contended that the value of the loan note should be deducted from the assets in the trust in which Mrs Elborne had a life interest meaning that the value of the assets in the trust aggregated with her free estate was nil.

There were several inconsistencies and errors in implementing the planning, including the fact that the title to the property had never been transferred from Mrs Elborne’s name to the trustees of the life interest settlement. HMRC took the view that this showed that there was never any intention to comply with the terms of the scheme but the First Tier Tribunal did not agree with this.

HMRC’s arguments

HMRC contended that the planning was unsuccessful and put forward four arguments in support:

1. The loan note liability arose as a result of the assignment by Mrs Elborne of her property to the life interest trust and thus under s103 Finance Act 1986 the liability was abated to nil.
2. Alternatively, the transfer of the property by Mrs Elborne to the life interest trust was a gift with reservation of benefit.
3. Alternatively, that the associated operations provisions applied and the loan note should be treated as property to which Mrs Elborne was entitled at the date of her death.
4. Alternatively, as Mrs Elborne had made an election under the pre-owned assets legislation, the property should be treated as subject to a reservation of benefit at the time of her death.
5. Additional arguments were also put forward including that the agreement selling the property to the life interest trust was void.

The Tribunal’s decision

The Tribunal dismissed all HMRC’s arguments with one vital exception: that under s103 Finance Act 1986 the amount of the liability under the loan note should be abated to nil. S103 provides that a liability incurred by the deceased shall be abated proportionately to the value of any consideration given for the debt which derived from the deceased.

In the Tribunal’s view HMRC’s s103 argument succeeded with the result that, “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 planning had therefore failed to take the value of Mrs Elborne’s property outside of her estate for IHT purposes, although a double charge to IHT was avoided.