Chester: 01244 354800
Liverpool: 0151 3210000
Legal 500 Top Tier Firm 2024  
Solicitors in Chester and Liverpool
Trusts and estates

Judgement in the first Home Loan scheme case to reach the Tribunal was handed down this week and provides a cautionary tale for clients who may have entered into similar schemes.

So called “Home Loan Schemes” were a popular inheritance tax planning arrangement before 2003 for taxpayers whose estates were over the nil rate band (£325,000) of which their main home formed a substantial part.   The purpose of such schemes was to remove the value of the home from the taxpayers estate for IHT purposes, whilst enabling them to continue living in their home rent-free for the rest of their life.

Whilst such schemes appeared to get around the gift with reservation of benefit (GROB) rules, the pre-owned asset tax rules (POAT) were then introduced to levy an income tax charge on individuals who continue to receive a benefit from assets they have disposed of.  The (POAT) charge also applied to existing arrangements which meant that taxpayers with Home Loan Schemes may have paid the POAT charge to keep their house out of the GROB net.

In the Herbert case, Mr Herbert owned a valuable London property in which he lived.  He entered into a Home Loan Scheme in 2002 in which he purportedly sold his house for £1.4 million to the Trustees of a life interest trust of which he was the beneficiary.  At the same time he entered into a loan agreement in which he agree to loan the Trustees £1.4 million which was repayable after his death.  Mr Herbert then assigned the benefit of the Loan Agreement to his three children.  From 2005/2006 onwards, Mr Herbert had paid the POAT charge which totalled just over £196,000.

In the facts of the case, the agreement relating to the sale of the house to the Trustees and the purported loan to the Trustees were found to be void under property law.  In consequence, the assignment of the “loan” was also void.  The house, now worth £2.95 million was therefore found to form part of Mr Herbert’s estate for inheritance tax purposes.

In the alternative, if there had in fact been a valid sale of the house to the Trustees, the Judge concluded that the house would have formed part of Mr Herbert’s death estate as his ability to dispose of it freely was restricted by the agreement to sell it to the Trustees.  In addition, because of his life interest, the value of the trust fund also formed part of his death estate although the trust had a liability of £1.4 million which could be deducted from the value of the settled property in Mr Herbert’s estate.

The Judge commented “this serves as a warning that the implementation of tax avoidance schemes can sometime have the consequence of the participants paying more tax than if they had done nothing: if you play with fire, do not be surprised if your fingers are burnt.”

As the case had turned on a point of property law, the Judge did not consider gift with reservation of benefit arguments, whether the transactions were a series of “associated operations” or the Ramsay principle.  Nonetheless, HMRC have previously stated that they consider the Home Loan Schemes to be ineffective under the gift with reservation of benefit rules.

HMRC have settled a number of similar cases recently and although the Herbert case may well be appealed, for clients who are worried about their own position, unwinding the arrangements may now seem more advantageous and avoids unwanted complications/litigation in the administration of their estate.

Should you require any assistance or further information about anything contained with this article, please do not hesitate to contact, Heather Lally on

Back to Insights

Sign up to our newsletter

Get regular news & updates