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Surprise Inheritance Tax Following Landmark Legal Case: Leslie Elborne v HMRC

Published by UK Property Accountants
Published Date: August 18, 2023

In a recent landmark court decision, a common Inheritance Tax loophole was closed, leaving many families worried about their financial future. Thousands of families who used a complicated loan plan to try to avoid inheritance tax could now get tax bills they thought they had avoided.

This decision by a tax tribunal has set a standard, which could mean that more families will be investigated for avoiding taxes.

The Rise and Fall of Home Loan Schemes

During the 1990s and early 2000s, several of families used "home loan" schemes to reduce their Inheritance Tax liabilities. These schemes, sold by top advisors, aimed to detach property value from estates and shield them from inheritance tax. The idea behind these arrangements was to transfer property ownership to a trust in exchange for a loan note, which was then gifted to a second trust.

If the giver survived for seven years, the gifts would not be subject to inheritance tax.

At the time, these home loan schemes were considered commonplace. However, rule changes in the early 2000s led to a significant reduction in their prevalence. HMRC introduced additional tax charges in 2003 & 2004, effectively putting an end to the widespread use of these schemes. Despite this, many families remain signed up to the arrangement.

The Landmark Legal Case

The recent tax tribunal ruling has shed light on the potential consequences of these home loan schemes. In the case of Leslie Elborne, who sold her home to a trust in 2003 in exchange for a loan note, her executors believed that no tax was due as she passed away over seven years later in January 2011.

However, the tribunal found against this arrangement, ruling that the property was still subject to inheritance tax.

This ruling has significant implications for other families who have used similar schemes to reduce their inheritance tax liabilities. HM Revenue & Customs now has a breakthrough ruling that solidifies their view that properties subject to these arrangements remain assets of an estate and are subject to inheritance tax upon death.

The Impact on Families

The implications of this ruling have left many families concerned about their financial future. Families who have used home loan schemes may now face unexpected tax bills that they believed they had successfully avoided. The potential tax liabilities can be substantial, with rates of up to 40% on the value of the property.

Noel Mooney of tax firm RSM has noted that HMRC is revisiting the validity of these arrangements even in cases where people have already passed away. This means that families who thought they had successfully navigated the inheritance tax system may now find themselves facing tax investigations and potentially expensive legal battles.

The Role of Wealth Managers

During the heyday of home loan schemes, reputable wealth managers, including eading advisers, were involved in advising on their suitability. However, the leading adviser has confirmed that it no longer advises on these schemes since the rule changes were introduced in the Finance Act 2004. Despite their involvement, the wealth manager was not directly implicated in the recent tax tribunal case.

It is important to note that home loan schemes were not always regarded as aggressive tax avoidance before the rule changes.

They were considered a legitimate way for families to reduce their inheritance tax liabilities. However, the recent ruling has now cast doubt on the validity of these arrangements, potentially leaving families in a precarious situation.

Conclusion

The recent landmark legal ruling has sent shockwaves through families who had utilised home loan schemes to reduce their inheritance tax liabilities. With the closure of this loophole, many families now face unexpected tax bills and potential legal battles with HMRC.

It is crucial for families to reassess their inheritance tax planning strategies and seek professional advice to ensure compliance with current regulations.

By exploring alternative methods and staying informed about the changing landscape of inheritance tax, families can navigate these challenges and secure their financial future.

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