There were reputedly 30,000 “home loan” or “double trust” schemes implemented in the late 20th and early 21st centuries and as people die these schemes have been increasingly challenged by HMRC since about 2011.
The ‘home loan’ arrangement in the case of Shelford v HMRC (2020 UKFTT 0053 TC was attacked by HMRC on a number of grounds including reservation of benefit, non-deductibility of the debt under s103 FA 1986 and associated operations. It is almost a year since the decision which crucially represents the first home loan scheme case to be heard at the Tribunal.
In this case the deceased Mr Herbert contracted in 2002 to sell his house to an interest in possession trust for himself. The purchase price was left outstanding as an interest free loan repayable on the settlor’s death and he then gave away that loan to the children. The purpose of the scheme was to remove the value of the house from the settlor’s estate for the purposes of inheritance tax, whilst enabling him to continue to live in the house rent-free for the rest of his life.
The FTT did not, however, substantially consider any of these points but instead held that the arrangements did not amount to a valid contract for the sale of land as it did not comply with Law of Property (Miscellaneous Provisions) Act 1989 section 2. Consequently, the house remained in the deceased settlor’s estate. In effect, nothing happened!
The judgment is very much limited to the particular facts of the case and an FTT decision is not binding precedent. It is nevertheless an important decision as it offers confirmation of HMRC’s position in cases where settlement with HMRC has yet to be reached. I have it on extremely good authority that the family will not be appealing against the decision.
Since these conclusions rested on property law only, the judge went on to examine the inheritance tax analysis in the event of an appeal on the basis that there was a valid sale of the house to the trustees.
He concluded that:
- The house would have formed part of Mr Herbert’s death estate as his ability to dispose of it freely was restricted by the agreement to sell it to the trustees.
- It also formed part of the settled property, also in his estate due to the life interest. The trust had a liability of £1.4m which the executors were entitled to deduct in calculating the total value of the settled property within his estate.
This meant the property value at death would be double-counted, to which the judge commented:
“This serves as a warning that the implementation of tax avoidance schemes can sometimes have the consequence of the participants paying more tax than if they had done nothing: if you play with fire, do not be surprised if your fingers are burnt.”
In one sense, the decision is a fairly problematic one which would be worthy of appeal. For instance, what if I were to sell my house but forget to mention that I had promised to leave all the light bulbs behind. If this promise had not been written down, would the sale of the property really be void? Ask a property solicitor but I do not think so. In another sense, it demonstrates that convoluted schemes which are put together by third parties and where the purported participants do not really understand (and therefore are not active players) can never be robust. They are subject to ‘the fortunes of war’, in this case taking the form of a particular judge’s interpretation of a particular section of an Act which may not even have been considered by the planners. It is also a demonstration of the principle that the family never know how successful or otherwise a plan is until the instigator dies and HMRC reviews the IHT100 and supplementary pages. The scheme promoters may have disappeared by that point and experience suggests that the taxpayer and those implementing the scheme may well have failed to retain or even acquire any of the crucial documentation which drove the arrangement. Not the best of legacies!
The link if you would find the full judgement entertaining –