Although lawyers caution about the risks, the inheritance tax home loan scheme outperforms HMRC

In the early 2000s, inheritance tax schemes that were widely marketed to middle-class consumers are now making their way to the courts as the tax office contests their legitimacy

In a recent case, the courts upheld the validity of a once-popular home loan scheme that was intended to lower an estate's value for inheritance tax purposes, but attorneys caution that the ruling might only be temporary.

In 200203, a home loanalso referred to as a double trust schemewas a common strategy for avoiding inheritance tax (IHT), according to the law firm Paris Smith.

In order to benefit themselves, it arranged for a homeowner to sell to a trust. In order to lower the home's inheritance tax-liable value, a debt for the unpaid purchase price was utilized.

A person could effectively give away the value of their house while still being able to live there for free.

Lawyers caution those who use similar schemes that they might not be as fortunate, even though the family of a woman who used one recently won a case in court.

"It is evidently very positive that the Elborne case was decided in favor of the taxpayer," stated Julia Rosenbloom, tax partner at Shakespeare Martineau. But given how particular the case's facts were, it appears very likely that HMRC will challenge the ruling.

It is doubtful that HMRC will accept the decision without protest because home loan schemes have been the target of persistent attacks for many years.

How have people evaded inheritance tax through home loan schemes?

Leslie Vivienne Elborne, who is now deceased, participated in such a scheme in 2003. On paper, she sold her house to trustees of a trust established for her children's benefit for £1.08 million.

She was given a loan note for 1 point 8 million, which was the scheme's home loan component, in return. She transferred the double trust portion of this note, from which she benefited nothing, to the trustees of a second trust.

She was permitted to live in the property for the remainder of her life without paying rent under the terms of the scheme. Elborne resided on the land until her passing in 2011.

Since Elborne had outlived the transfer by more than seven years, the executors interpreted the loan note as a potentially exempt transfer on which IHT was not due when winding up her estate.

For the purposes of IHT, the property was included in Elborne's estate because she had a life interest in it; however, the loan note's value was deducted.

With the argument that IHT was due on the property, HMRC objected to this arrangement and won its case in the first-tier tribunal.

Nevertheless, Elborne's executors filed an appeal with the higher tribunal, and HMRC lost this case in February. But this most recent ruling is anticipated to be appealed by the tax office.

Cases involving double trust home loan schemes have only recently made it to the tax tribunals. According to Paris Smith, a law firm, HMRC has already won twice at the first tier tribunal (on different grounds).

Can I still avoid inheritance tax by using home loan schemes?

The double trust home loan loophole was closed by HMRC twenty years ago, and such schemes can no longer be established. However, Paris Smith believes there are still a lot of them that will be discovered in the years to come as the original homeowners pass away.

By imposing an income tax obligation on inheritors that was correlated with the rental value of the home, the pre-owned assets tax (POAT), which was implemented in 2005, rendered home loan schemes unappealing.

According to Rosenbloom, tax partner at Shakespeare Martineau, "Despite arguments to the contrary, HMRC has simply never accepted that such schemes worked.

"This may result in a higher total tax liability than if participants had just not joined the plan, and the desired inheritance tax savings may not be realized.

You should seek professional tax advice if you or a loved one is enrolled in a home loan program.

Rosenbloom stated, "There are situations where winding up the structure might be preferable to leaving it in place."

Not only could this result in a better tax position than maintaining it, but resolving the issue with HMRC beforehand can give everyone involved clarity and peace of mind.

A separate article explains how you can use gift allowances to avoid inheritance tax.