Double trouble trust schemes – recent cases

Posted: 04/09/2023

This article considers recent cases on widely marketed inheritance tax planning schemes, referred to as the ‘home loan scheme’, or ‘double trust scheme’.

The double trust scheme was used around 20 years ago as a way of potentially mitigating inheritance tax through relatively complex planning involving two trusts. The scheme took various forms but involved an individual establishing an interest in possession trust (also known as a life interest trust), of which the individual was the main beneficiary (‘Trust 1’). The individual sold property, for example their residential home or, as in the case of Pride v HMRC [2023] UKFTT 316 (TC), property and investment bonds, to the trust in return for loan notes. The individual would then gift the loan notes to another trust for the benefit of their children (‘Trust 2’). 

The scheme was designed to reduce the value of the individual’s estate for inheritance tax purposes. As the individual was the life tenant of the first trust, they were entitled to continue living in the property or benefitting from the assets for their lifetime. The idea was that, despite this, when the individual passed away, their personal representatives would be able to deduct the value of the loan notes from the value of their estate when calculating the inheritance tax liability. 

The efficacy of the double trust scheme has been a point of contention for many years, but it is only recently that the scheme has been tested in the First-tier Tax Tribunal (FTT) in the cases of Shelford & Ors v HMRC [2020] UKFTT 0053 (TC), Pride v HMRC, and, most recently, Elborne & Ors v HMRC [2023] UKFTT 626 (TC).

Mr Herbert, Mrs Pride, and Mrs Elborne had all sought to mitigate inheritance tax through the double trust scheme in the early 2000s. Following their deaths in the early 2010s, their personal representatives declared their respective estates to HM Revenue and Customs (HMRC) and deducted the value of the loan notes from the value of their estates when calculating the inheritance tax liability. 

In all three cases, HMRC argued against the deductibility of the loan notes when valuing the individuals’ estates for inheritance tax purposes. 

The FTT agreed with HMRC’s determination of the loan notes in each permutation of the double trust scheme. The FTT held that the loan notes were a debt incurred by Trust 1, and because Mr Herbert, Mrs Pride, and Mrs Elborne were life tenants of their respective trusts, the loan notes were also a debt of them as individuals. Therefore, the loan notes were abated to nil for inheritance tax purposes. 

Further, in Pride and Elborne, HMRC also argued that the transfer of assets to Trust 1, and gift of the loan notes to Trust 2, were subject to the gift with reservation of benefit (GROB) rule and therefore formed part of the individual’s estate for inheritance tax purposes. The FTT found that there was no reservation of benefit in these cases. 

Whilst it is yet to be seen whether the FTT’s judgments will be appealed in any of these cases, the outcome will be of concern for those who have undertaken, and continue to rely on, these or similar arrangements.  

As a general rule, debts and liabilities are deductible for inheritance tax purposes. For example, a mortgage secured against your property, and any outstanding debts incurred during your lifetime, such as credit card bills or outstanding loans, can be deducted when calculating your estate. 

However, there are circumstances where debts and liabilities are not deductible for inheritance tax purposes, and these include:

• if you have a business as a sole trader or partnership, any business debts must be deducted against business property (and not from your estate);
• where you have borrowed money and this money is used to buy assets which qualify for inheritance relief, such as business property relief or agricultural relief, you cannot deduct the loan when calculating your inheritance tax liability;
• further, if you borrow money in the UK, which is then taken offshore by a non-UK domiciled individual or trustee and used to purchase assets outside of the UK, the loan cannot be deducted to reduce the value of your UK estate; and
• where you have a life interest in settled property which is treated as forming part of your estate for inheritance tax purposes, and your personal debts exceed your assets, the surplus debts cannot be deducted against the value of the settled property. 

The Shelford, Pride and Elborne cases are a reminder of the importance of reviewing your estate planning arrangements regularly, at least every five years or following a major life event. 

They also highlight the sheer length of time, associated uncertainty and potential cost for estates to be administered where such schemes are still in place at the time of death. It is therefore equally important to obtain up to date and bespoke advice in respect of any pre-existing trust structures to ensure they remain tax efficient and reflect your wishes. 

If you have undertaken any historic tax planning or would like to review your will and affairs in general, please do not hesitate to get in touch with our private client team who would be happy to help you.  

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