In the recent Upper Tier Tax Tribunal (UT) decision in Elborne v HMRC [2025] UKUT 00059 (TCC), the UT set aside the First Tier Tax Tribunal’s (FTT) decision in favour of HMRC to declare the ‘home loan’ tax avoidance scheme a success.
This case highlights a number of interesting elements of Trust Law intertwined with some Contract Law and Probate Law for good measure. In simple terms, Mrs Elborne owned a property. It was worth a fair sum of money therefore she wanted a way to minimise the Inheritance Tax (IHT) liability due on her death. Her advisors came up with a rather sophisticated plan to this end. By way of illustration, please see the diagram below:
Mrs Elborne ‘sold’ her property to the newly created ‘Life Settlement’ Trust, which gave her a right to live in the property The ‘Life Settlement’ Trust then ‘purchased’ the property for an ‘IOU’ (effectively a note outlining the debt). Any Contract Law aficionados will know that this constitutes a binding contract- not a gift. Mrs Elborne then gives said ‘IOU’ to a second Trust – the ‘Family Settlement’. This is the ‘gift’ in question that amounts to a Potentially Exempt Transfer (or PET). For the PET to succeed, Mrs Elborne would need to survive 7 years from the date of the gift for it to pass free of IHT. As she died over 7 years after the ‘gift’, her Executors proceeded to address the IHT position on the estate on the basis that the full value of the ‘IOU’ be deducted from the estate.
Unsurprisingly, HMRC were not going to take this lying down; I suppose losing out on circa £720,000 is worth fighting for. The FTT were initially asked to consider whether or not the said ‘IOU’ was a valid debt; HMRC argued that it was not, claiming it was merely a clever roose to undervalue the estate for IHT purposes. Although unsuccessful in the FTT, the Executors of Mrs Elborne’s estate pursued an appeal with the UT who ultimately ruled in their favour. The UT determined that this was a valid mechanism to reduce the IHT liability on death and thus set aside the FTT decision.
An anecdotal point to note is that the notion of a ‘gift with reservation of benefit’ did not feature too highly in these proceedings. On the surface, the writer’s initial expectation was that this would be the crux of HMRC’s argument. After taking a closer look at the facts, it appears that eponymous GWROB doesn’t apply. Strictly speaking, the gift in question was the ‘IOU’, not the property itself- therefore any ongoing enjoyment of the property would not amount to a ‘reservation of benefit’ as there is no tangible enjoyment to be taken from a debt.
This case underscores the complexities of IHT planning and therefore the importance of meticulous advice given the heightened scrutiny from HMRC. Given the likely sums in question, the writer would expect even the most airtight of advice to be fought tooth and nail by HMRC who will be after every penny they can get their paws on. Whilst it can appear attractive to take steps to mitigate IHT liabilities, the cost of the initial advice and the possibility of needing to put forward a robust defence against HMRC is not to be overlooked.
Understandably, HMRC are appealing the decision and given the vast number of similar arrangements that were implemented in the early 2000’s it would not surprise the writer if a final determination ended in the Supreme Court.
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