What was the case about?
This case was about a tax-saving plan used by Mrs Leslie Vivienne Elborne. She wanted to reduce the amount of inheritance tax (IHT) her estate would have to pay after she died. The plan involved moving ownership of her house into a trust while still living in it. HM Revenue & Customs (HMRC) said the plan didn't work and took the case to court.
How did the planning work?
Mrs Elborne used a tax planning method called the home loan scheme. It worked like this:
- House transfer: Mrs Elborne put her home (worth £1.8 million) into a trust.
- Loan agreement: The trust issued a loan note as consideration for the property which was assigned to a second trust to exclude it from her estate.
- Debt created: Mrs Elborne's assignment of the loan note was treated as a gift (Potentially Exempt Transfer). Falling out of her estate after 7 years.
- Living in the house: Mrs Elborne continued to lived in the home, which caused suspicion from HMRC.
Why did HMRC challenge it?
HMRC argued that the plan was designed to avoid tax and should not work because:
- She still lived in the house: Even though ownership had changed, she continued using it as her home. This triggered rules that stop people from giving away assets while still benefiting from them.
- Artificial structure: The plan was seen as a way to get around IHT without truly giving up control of the house.
- The loan wasn't real: HMRC claimed that the “loan” used to reduce the estate's value wasn't a genuine liability.
What did the courts decide?
- First-Tier Tribunal (FTT): The first court agreed with HMRC. They said the plan didn't work, and the house was still part of the estate for tax purposes.
- Upper Tribunal (UT): The executors of Mrs Elborne's estate appealed the decision. The Upper Tribunal found that the FTT had made an error in law when interpreting the tax rules.
What was the legal error?
The key issue was whether the loan note could be deducted from Mrs Elborne's estate for IHT purposes. The UT found that:
- The FTT wrongly treated the loan note as a debt due to Mrs Elborne. In reality, the debt belonged to the trustees of the life interest trust, not to her personally.
- Even though Mrs Elborne had a right to benefit from the trust, that did not mean the trust owed her the money.
- Because of this error, the UT allowed the executors' appeal, ruling that Section 103 of the Finance Act 1986 did not apply to disallow the loan note liability.
HMRC also appealed five other points where the FTT had ruled in favour of the executors. However, the UT dismissed all of HMRC's cross-appeals, meaning those rulings in favour of the executors still stood.
What does this mean?
This case confirms that HMRC will challenge tax-saving plans that don't truly remove assets from an estate. However, it also shows that courts may correct legal mistakes if tax rules are wrongly applied.
For anyone using complex tax planning methods, this case highlights the importance of getting the legal structure right to avoid unexpected tax consequences.
Sources
Gov.uk