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A briefing on Home Loan tax avoidance Schemes (HLS).

The first HLS case was taken to the tribunal in 2019. In John Leonard McNeill Shelford as Trustee of the Herbert Life Interest Trust Settlement & Ors v HMRC [2019] TC7549, the First Tier Tribunal found that the home loan scheme in question was a void transaction with the assets remaining in his estate on death. It involved the sale of the taxpayer's home to a trust in return for a loan. The loan was then gifted to his children, whilst he remained living in the home until death. 

In dismissing the appeal the FTT found:

Since these conclusions rested on property law only, the judge went on to examine the IHT 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:

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.”

An FTT decision is, of course, not a binding precedent so we must wait to see if it is appealed to the Upper Tribunal.

HMRC have reached a number of settlements. The Institute of Chartered Accountants of England and Wales (ICAEW) have met with HMRC to try and obtain clarification for those wanting to avoid litigation as to how these settlements are agreed. HMRC have issued guidance in their IHT manual (IHTM44120) on unwinding such a scheme.

Background

There appear to have been very few schemes established since 2003, but many which continue to exist were established before then.

What's the position now?

Settling with HMRC

It remains to be seen what action HMRC will take following the case, particularly for anyone who may be in the middle of settlement negotiations. Prior to the Herbert case HMRC had indicated the following:

Useful guides

IHT: Pre-owned asset tax (POAT)
What is the pre-owned asset tax? When does it apply? Are there any exclusions or exemptions?

IHT: estate planning checklist
This basic checklist covers some of the essential planning points that taxpayers should know when planning for their estate and inheritance tax.

UK Trusts
This guide deals with the taxation of UK trusts. 

External link:

HMRC Inheritance Tax Manual (IHTM 44120)