Pre-owned assets: specific avoidance schemes: land - double trust or home loan scheme: alternative approach
In addition to the arguments that double trust or home loan schemes fail to avoid the reservation of benefit provisions, there are two alterative approaches that will negate the intended consequences of the scheme.
The first is that the provisions of FA86/S103 apply to disallow the deduction of the loan against the trust in which the individual retained a life interest. The sale of the property to the first trust is a disposition and since, in the majority of cases, the trustees had no means with which to pay for the property, the steps they took to fund their purchase created the debt which (through the trustees equitable lien) is an incumbrance against the property. The consideration for the debt was property derived from the deceased and FA86/S103 applies to abate the loan.
Secondly, having regard to the purpose and effect of home loan schemes, the steps taken are a pre-ordained series of transactions, and following the line of authority that is founded on W T Ramsay v IRC  1 AER 865, the individual steps should be treated as a single transaction comprising a number of elements which when taken together have the effect that the vendor has made a ‘gift’ of the property concerned for the purposes of FA86/S102 and has continued to live there. So reservation of benefit arises in the property.
If either of these alternative arguments is found to be correct, they will have an effect on the POA charge. Given the uncertainty of the position pending a decision, taxpayers should continue to self-assess their POA liability on the basis that they believe to be correct. Further guidance has been provided in “Guidance Note 6”
Guidance Note 6.
As explained in Income Tax and pre owned assets guidance section 5 (now incorporated within IHTM44104, and IHTM44105), HMRC is now of the view that none of the variants of the home loan or double trust scheme succeed in circumventing the reservation of benefit rules. This will affect taxpayers who have put such a scheme into place and are now paying Income Tax in respect of a pre-owned asset. If it is held that a reservation of benefit does exist in the property that was sold to the trust in which the taxpayer retained a life interest, the pre-owned assets (POA) charge will not apply by virtue of paragraph 11(5)(a) Schedule 15 FA’04.
Whilst a decision on the correct treatment of home loan or double trust schemes is awaited, HMRC’s approach is that those paying the POA charge as a result of setting up such scheme should continue to do so, in the knowledge that should HMRC’s view prevail, all the Income Tax that has been paid under the POA charge will, subject to a claim being made, be repaid (with interest) irrespective of any time limits for repayment that might otherwise apply.
The benefits of taking this option are that it:
- Continues to collect the tax that the taxpayer considers is due.
- Involves no extra costs in making repayments of now, only to have to recover the tax plus interest later should HMRC’s view not prevail.
- Involves little or no extra work to regularise the position should HMRC’s view not prevail; as the income tax has been paid correctly.
- Avoids any complications should the taxpayer die before the position is settled. If the income tax was repaid, it would only be on the basis that exemption from the POA charge applies. This would mean that the property is subject to a reservation of benefit and the Inheritance Tax due on the estate should be paid accordingly.
Where the taxpayer who put the scheme into place has died and has paid the POA charge either whilst they were alive or through their personal representatives after death, HRMC’s approach is that this position too should be left undisturbed until a decision is handed down, as this minimises the future costs and inconvenience should HMRC’s view not prevail.
As far as Inheritance Tax is concerned, personal representatives should pay the tax that they consider is due. If this is less than the full amount that would be payable should HMRC’s view prevail, they may choose to make a payment on account of the additional Inheritance Tax that would be due so as to reduce future interest charges. Any subsequent repayment of income tax will form an additional asset of the estate.
Where an estate has been settled on the basis of HMRC’s previous view of the law, neither the Inheritance Tax nor the POA charge will be re-opened.
(An archived copy of Guidance Note 6 can be found on the HMRC website, reproduced here for ease of reference).