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 a home loan scheme was not effective IHT planning. The transactions were void and the assets remained in the estate on death.

Home Loan Schemes were a strategy to save inheritance tax on the passing of a family home.  

  • They involved selling properties into trust whilst creating a loan to be set against the value of the home on the death of the last settlor. The owners could continue to live in the property.  
  • SDLT, CGT and IHT were avoided, as well as the gifts with reservation provisions.
  • To counter these schemes the Pre-Owned Assets Tax (POAT) was introduced in 2004.

In 2002 Mr Herbert set up a discretionary trust for his children in which he had a life interest. He was a trustee together with Mr Shelford.

  • He entered into an agreement to sell his home to the trust for £1.4m. The consideration was left outstanding as an interest-free loan to the trustees, repayable at any time.
  • A form TR01 to transfer legal title, dated March 2002, was filed with the land registry in 2016. It was incorrectly dated and stated the transfer was for no value. The date was later amended to 2016 and SDLT was paid.
  • Mr Herbert and his children entered into a deed of assignment to transfer his interest in the debt created by the loan to his children in equal shares.
  • The terms of the trust allowed him to continue living in the house. This he did, rent-free until his death in 2013 by which time the house was worth £2.85m.
  • From 2005/06, Mr Herbert became liable to POAT paying £196,013 for 2005/06 to 2013/14.
  • The house was sold in 2016 for £3.9m and the loan was repaid to the children in 2018.

The FTT dismissed the appeal and found:

  • The terms of the loan and sale agreements were such that the consideration due for the house was not discharged. This was the SDLT avoidance part of the transaction.
    • This, and the fact that the sale agreement for the house did not meet the property law requirements for a valid transfer due to its interaction with the loan agreement, made the sale agreement void. The house formed part of Mr Herbert’s estate on his death, at its then value of £2.85m.
    • There was never any intention for the terms of the agreements to be honoured.
  • As a result, the gift to the children made under the Deed of Assignment was also void and on Mr Herbert's death and the house did not form part of the settled estate.
  • In addition, as he did not dispose of the house, he would not have had any liability to POAT, nor to any capital gains tax on the purported sale of the house to the trustees. The HMRC IHT determinations must be varied to reflect this, which was for the parties to agree upon, including any entitlement of refunds of POAT and capital gains tax paid by Mr Herbert.

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:

  • 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.”

Comment

This was the first home loan scheme case to be heard at the Tribunal. Such schemes have since been stopped by the introduction of POAT, but it is nevertheless an important decision for all cases where no settlement has yet been reached with HMRC. An FTT decision is of course not binding precedent, so we must wait to see if it is appealed to the Upper Tribunal.

Links to our guides:

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

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

External link:

John Leonard McNeill Shelford as Trustee of Herbert Life Interest Trust Settlement & Ors v HMRC [2019] TC7549

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