Inheritance Tax Mitigation Scheme Ends in Abject Failure

If offered the opportunity to shelter their homes against future Inheritance Tax (IHT) liabilities whilst retaining the right to live in them rent free, most people would jump at the chance. However, as one case strikingly showed, that holy grail of tax planning is extraordinarily hard to achieve.

The case concerned a widower with three children who entered into a scheme which was designed to reduce future IHT liabilities. In essence, it involved the purported sale of his home for £1.4 million to a trust of which he was one of the trustees. He purportedly lent the money to the trust in order to fund the purchase and subsequently assigned his right to repayment of the loan to his children.

Following his death, the executors of his will frankly acknowledged that the objective of the scheme was to remove the value of the property from his estate for IHT purposes, whilst enabling him to continue living in it rent free for life. HM Revenue and Customs, however, took the view that the scheme was ineffective and raised an IHT demand against his estate totalling £560,000.

In rejecting the executors’ challenge to that decision, the First-tier Tribunal (FTT) noted that, after the scheme was put in place, legal title to the property remained registered in the widower’s name and he was still living in it when he died. He did not, at the relevant time, have £1.4 million to lend to the trust. The sale and loan agreements had a sense of unreality about them and there had never been any intention to honour them in practice.

The FTT found that both agreements, together with the loan assignment, were void from the outset. On that basis, the property, which was worth £2.95 million when the widower died, formed part of his estate and was subject to IHT.