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HMRC internal manual

Inheritance Tax Manual

Pre-owned assets: unwinding of home loan or double trust scheme: background

Taxpayers may want to unwind home loan or double trusts schemes (IHTM44103) they entered into. Unwinding these schemes will have consequences for Inheritance Tax (IHT) and the following pages set out our approach if this happens. By unwinding we mean that taxpayers will effectively have negated all the IHT effects of what they had entered into, and it will, on the whole, put them back into the position they were in before entering into the arrangement.  

In some circumstances taxpayers will need to consider the Capital Gains Tax (CGT) or Income Tax (IT) consequences of unwinding the scheme in relation to the loan. Taxpayers should consider taking professional advice before considering unwinding their home loan schemes. HMRC does reserve its right to alter its view, but any schemes unwound whilst this agreement is in place will not be revisited. 

Income Tax and pre-owned assets (POA) guidance note 6 (reproduced in the IHT Manual at IHTM44106) confirmed HMRC’s view that none of the variants of the home loan or double trust scheme succeed in circumventing the IHT gift with reservation of benefit (GWR) provisions (IHTM14301). Whilst a final judicial decision on the correct treatment of the home loan or double trust scheme is still awaited, HMRC’s approach was that those paying the POA charge (IHTM44001) should continue to do so, in the knowledge that a full POA repayment would be made should the Court find in favour of HMRC.  

Due to the length of time, and the uncertainty of litigation, HMRC have agreed proposals for unwinding schemes to bring the property back into the taxpayer’s estate. HMRC cannot give advice on how to unwind home loan schemes or, because each scheme is different, whether there are any other tax consequences arising from unwinding a particular scheme, but these pages set out the position for IHT for those taxpayers that choose to do it.  

Current basis of settlement

At present, where the scheme has not been unwound HMRC are prepared to settle cases, prior to a judicial decision, on the basis that a GWR arises in the house or other property comprised in the settlement in which the settlor had a qualifying life interest to the extent the house or other property is subject to the loan (see the examples in the following pages). We would then expect to see the value of such property included as a GWR in the estate of the deceased person on death.  

Where property was settled jointly we would expect to see the deceased’s share of the property in which they had an interest in possession reflected in their estate on death. No joint property discount (IHTM15072) or spouse exemption (IHTM11031) is applicable. This would mean that IHT has to be paid on the first death on their share to the extent it is subject to the loan. 

HMRC’s view is that the qualifying interest in possession (IIP) does not exist in the property to the extent it is subject to the loan (FA86/S102(3) does not apply). The deceased does retain a qualifying interest in possession in the excess value over and above the loan which can qualify for spouse exemption. The examples in the following pages make this clear.   

Unwinding schemes

If the home loan or double trust scheme is unwound during the taxpayer’s lifetime then (assuming the house remains in their estate at death) it will again be subject to IHT on death as an asset of their estate. However, unlike the position above joint owners will be able to claim spouse exemption where the property passes to the surviving spouse. In that event the tax charge on the whole property is deferred until the death of the surviving spouse. 

Cessation of reservation

When the scheme is unwound during the taxpayer’s lifetime (either by the loan being assigned back to the taxpayer or written off) the property is no longer subject to a reservation of benefit, and the whole house (or other property comprised in the qualifying IIP trust) is part of the taxpayer’s chargeable estate without a deduction for the loan. The GWR provisions provide that when a property ceases to be subject to a reservation of benefit the taxpayer is deemed to have made a potentially exempt transfer at that time. There is no loss to the taxpayer’s estate when the reservation ceases as a result of unwinding, so long as the property becomes comprised in the taxpayer’s estate.