Inheritance tax loophole slams shut as landmark legal case opens floodgates for HMRC crackdowns
Thousands of families who were advised to use ‘home loan’ schemes could now face giant unexpected tax bills
UNSPLASH
An inheritance tax loophole that was once considered “run of the mill” has now been scuppered by a landmark legal ruling, leaving many families concerned for their financial future.
Thousands of ‘home loan’ schemes were sold in the 1990s and early 2000s by top advisors including St James’s Place, with the intention of detaching property value from estates to reduce inheritance tax (IHT).
HM Revenue & Customs have now been handed a breakthrough by a tax tribunal that has cemented a “long standing view that properties subject to these arrangements remain an asset of an estate on death and are subject to IHT.”
In papers published last month, a tax tribunal is shown to have forced a family to pay IHT on a £1.8million property previously thought to have been shielded from death duties.
Noel Mooney of tax firm RSM, told The Telegraph that home loan schemes were “run of the mill” before rule changes in the early 2000s.
UNSPLASH
In a bid to avoid IHT, Leslie Elborne sold her home to a trust in 2003 in exchange for a loan note, which she then gifted to a second trust.
If the giver survives for seven years, then gifts are not subject to IHT.
Leslie died over seven years later in January 2011, and so her executors reasoned that no tax was due.
However, the tribunal found against this arrangement, setting a precedent for other families’ cases.
The first-tier tax tribunal upheld HMRC’s decision, leaving the family open to a potential tax bill of 40 per cent.
Though not involved in this specific case, Britain’s biggest wealth manager St James’s Place told The Telegraph that it had previously advised on “the suitability” of such arrangements.
A spokesperson said: “We advised on the suitability of the product but ultimately referred to a law firm and haven’t done so since the rule change was introduced in the Finance Act 2004.”
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The prevalence of home loan schemes was greatly reduced by HMRC’s introduction of additional tax charges in 2003 and 2004, yet many families remain signed up to the arrangement.
Noel Mooney of tax firm RSM, told The Telegraph that home loan schemes were “run of the mill” before rule changes in the early 2000s.
While few arrangements might have been set up since the rule changes, Mooney has noticed HMRC taking a closer look at existing cases.
Mooney said: “We are still seeing cases where people are dying and HMRC is revisiting the validity of these arrangements.”
It comes as the Office for Budget Responsibility’s recent forecast suggested inheritance tax receipts would hit £7.2billion this year.
There are various ways to legally slash inheritance tax, with making gifts prior to death being one that advisors have leaned on for years.
Ben Harrison, associate financial planner at Equilibrium Financial Planning said: “Gifting to your loved ones is the easiest way to pass on your assets without paying tax.”
A person has an annual exemption of £3,000 each tax year, with people able to give away this amount without it being added to the value of the estate for inheritance tax purposes.