In the early 2000s thousands of “home loan schemes” were set up as a way of minimising IHT on the value of the home by transferring ownership to a trust.
HMRC now says such schemes “don’t work” but their effectiveness has never been legally tested.
Also known as “double trust schemes”, they worked in this way;
- A homeowner sold his house/flat to a trust which he had created for his own benefit
- The trust would pay for the purchase by some form of loan
- The trust would allow the former owner to continue to occupy his home rent-free
- Soon afterwards the homeowner would give the benefit of the loan to another trust, from which he was totally excluded.
- That gift would be a potentially exempt transfer - allowable until IHT rules changed in 2006
- The gift therefore dropped out of account for IHT after seven years
- On death, the loan would be deductible from the then value of the house/flat and only the difference would suffer IHT.
By 2004 HMRC had decided such schemes fell foul of the ‘reservation of benefit’ principle, whereby an ownership benefit is still enjoyed by a non-owner.
The government responded by giving those with a home loan scheme an extraordinary choice: accept that they had actually reserved a benefit in their home, or be subject to a “pre-owned assets income tax” charge (POAT) which it introduced in 2004 for this purpose.
Anthony Nixon, tax partner, says: “It is still very hard to understand why the government felt that POAT was a better way of preventing what they saw as undesirable tax avoidance than reshaping the IHT rules. In particular, there seems to be not just a loophole, but a gaping cavern, for those who took up the option to elect into ROB .”
HMRC contends that electing into ROB means the loan cannot be deducted from the eventual value of the property.
Anthony comments: “It is hard to see how, technically, they can be right. Meanwhile the IHT effectiveness of the home loan scheme has still not, more than 15 years later, been examined by a tax tribunal, let alone the higher courts. HMRC make it very clear that they consider that the scheme ‘does not work’, but they face a considerable hurdle in convincing the courts of this.”
For instance, in Ingram (1997) the House of Lords ruled that it was possible for an asset to be divided, so that part of its value was given away, and part retained, without ROB applying.
There are other tax issues.
In particular most of the loans put in place will be deep discount securities, which impose an income tax charge on the whole of the difference between the original value of the loan and the amount repaid. Since the loans were usually worded so that nothing was repayable until the death of the homeowner, their original value will typically have been only a third to a half of the amount repayable. Since 2013 it has not been possible to claim an IHT deduction for a loan that is not actually repaid.
All in all, it is unlikely that anyone with a home loan scheme in place would now be able to take full advantage of the IHT saving originally envisaged.
Many clients will not want to be “in trouble with” HMRC or run the risk of being involved in litigation with HMRC. But until the courts finally rule on the IHT issues, there could still be some real savings under existing schemes.
Anyone thinking of winding up a scheme now needs very careful advice on the tax implications and Anthony Nixon and Sarah Phillips, Partners at Irwin Mitchell Private Wealth, both have considerable expertise in this area.
Published: 22 February 2018
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