HMRC internal manual

Inheritance Tax Manual

IHTM44104 - Pre-owned assets: specific avoidance schemes: land - double trust or home loan scheme: loan repayable on demand

Where the loan is repayable on demand, HMRC’s view is that the loan will be property subject to a reservation until such time as the trustees call in the loan. The reason for this is that if the trustees of the second trust call in the loan, the first trust would be forced either to sell the home to repay the debt, or to seek finance from elsewhere. If the house were sold, then the individual will be unable to occupy it as life tenant. In order to avoid the need for a sale, the first trust would have to find a third party willing to lend 100% of the value of the property on the basis of a covenant by the trustees, and security over the house. Even if such borrowing could be obtained, which must be extremely doubtful, it would be prohibitively expensive.

The trustees of the first trust could only justify taking on such borrowing if they were financed by the life tenant who would be benefiting from the property by residing in it. On this basis, the trustees of the second trust, by not calling in the loan, have enabled the individual to retain a significant benefit in the loan. The gift of the loan and the trustees omission to call it in are associated operations, and in view of the provisions of FA86/Sch20/Para6(1)(c) - which states that ‘where the donor obtains a benefit by virtue of any associated operations, of which the disposal by way of gift was one, that benefit shall be treated as a benefit to him by contract or otherwise’ - the scheme does not avoid the provisions of FA86/S102(1)(b).

On this basis, it would seem that the exemption in FA04/Sch15/Para11(5)(a) would apply so that the pre owned assets (POA) charge does not arise in the loan note and as the loan note derives its value from the home’s value, the home will be exempt from the POA charge under FA04/Sch15/Para11(1)(b) as ‘other property deriving its value from the relevant property’.