The Home Loan Scheme – not to be overlooked ...

News  |   13 October 2023

Written by
Rachel Whitmey, Associate Solicitor

The ‘Home Loan Scheme’, also known as the ‘Double Trust Scheme’, was widely used many years ago as an Inheritance Tax (IHT) planning strategy with a view to mitigating IHT on death. The detail is complex but, in broad terms, the theory behind the scheme was essentially to remove the value of the family home from a person’s taxable estate on death whilst at the same time enabling that person to continue living in the property rent-free for the remainder of his life.

The mechanics of the scheme would typically involve an individual creating an ‘interest in possession trust’ naming himself as principal beneficiary entitled to receive income arising on the Trust (‘Trust 1’). As creator of the Trust, that person would also be regarded as the ‘Settlor’. The family home would be ‘sold’ to the Trust but, rather than receiving cash sale proceeds, the promise of a loan repayment would be accepted from the Trustees thereby creating the ‘home loan’ element of the scheme.

That same person would then create a second Trust for the benefit of his own children (‘Trust 2’) thus creating the ‘double trust’ element of the scheme. The benefit of the loan owed from the Trustees of Trust 1 would essentially be gifted to Trust 2. That gift would be classified as a ‘potentially exempt transfer’ so that the donor of the gift (who would also be settlor and principal beneficiary of Trust 1) would need to survive 7 years from the date of making the gift for it to fall outside the value of his own taxable estate on death.

In so far as the value of the house was concerned, this would always remain within the taxable estate of the person putting these arrangements in place, in his capacity as principal beneficiary of Trust 1. However, those in favour of the scheme have over the years sought to argue the value of the loan due back from the Trustees of Trust 1 should be deducted from the value of the house thereby reducing the value of the death estate for IHT purposes resulting in a reduced IHT liability for the estate.

Importantly, HMRC clamped down on the Home Loan Scheme some years ago as a result of the Finance Act 2004 by bringing in the Pre-Owned Asset Tax Regime. This gave clients some choices as to whether to pay tax on the deemed benefit of living in the property rent free or to elect within a period of time to treat the property as having been the subject of a reservation of benefit.

Tribunal cases have also emerged years started to challenge the efficacy of the Home Loan Scheme. Tribunal cases are starting to emerge with the most recent challenge being made in the matter of Elborne & Ors v HMRC [2023] UKFTT 626 (TC). These challenges make for serious reading and in instances where HMRC is successful, are likely to result in death estates paying more tax than would otherwise have been the case had the scheme not been adopted at all.

As a result of changes over the years to tax legislation, coupled with challenges now made by HMRC, the tax-efficiency of the Home Loan Scheme is now very much in question.

If you or a family member may have set up this type of scheme arrangement in years gone by, please seek specialist advice from our Private Client team and we would be pleased to discuss further with you and consider what action could be taken at this stage to prevent potential problems for your estate, including the risk of increased tax liabilities following death.

Call us today on 020 8290 0440.

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