In 2003, the deceased sold her home to the trustees of a trust for the benefit of her children in return for a loan note. She continued to live in the home and pay the outgoings. She then gave the loan note to the trustees. She died more than seven years after that gift, so that it became a potentially exempt transfer.
After her death in January 2011, the executors claimed for a reduction of inheritance tax on the basis of the home loan scheme. They submitted that while the deceased’s home was deemed to form part of her estate through her interest in possession in the life settlement, the inheritance tax value of the estate at the time of her death should be reduced by the value of the liability under the loan note at that time. That amount was broadly equal to the value of the home at the time when the home loan scheme was implemented.
HMRC disagreed and disallowed the loan note deduction. The executors appealed to the FTT.
Rather predictably, the FTT agreed with HMRC that the liability under the note should be abated to nil for inheritance tax purposes under s.103 Finance Act 1986, since that liability consisted of an incumbrance created by the gift of the property to the trustees of the life settlement. As a secondary position, HMRC also argued that the gift of the property to the trust was a gift subject to a reservation under s.102 of the same Act, so that the property should be treated as part of her estate upon her death.
If the FTT accepted both the s.102 and s.103 grounds of HMRC’s argument, the value of the deceased’s estate would be increased by an amount equal to double the value of the loan note. The FTT also found that it was not clear at all that there would be any relief from the double charge to tax that would then arise, which would be ‘a surprising result’ and ‘quite unwelcome’ to the executors. Moreover, the FTT said, there would be ‘something odd’ in both treating the loan note as an asset of the estate pursuant to s.102 at the same time as abating the liability under the note to zero under s.103 on the ground that it was a debt incurred by the deceased.
The FTT reasoned that the benefit received by the deceased by virtue of the gift of the note, as well as the right to occupy the property for the rest of her life, had existed before the gift was made and before the life tenancy arose. It thus did not impact upon the possession and enjoyment of the note by the trustees. Therefore, the FTT concluded, s.102 could not have had any effect in relation to the note and HMRC’s alternative argument regarding the s.102 note issue should be rejected in these circumstances.
The effect was that a double tax charge did not arise against the estate as a result of the home loan scheme, although the scheme did completely fail to save any inheritance tax
To see the case of Executors of Leslie Vivienne Elborne v HMRC, 2023 UKFTT 626 TC click the link below:
https://www.bailii.org/uk/cases/UKFTT/TC/2023/TC08863.html
Stephen Parnham
