In what was once hailed as a solution to reduce inheritance tax (IHT) liabilities, historic home loan schemes are now becoming a potential “time bomb” for homeowners. Families are being encouraged to reconsider their involvement in these complex trust setups and potentially unwind them to save their loved ones from facing hefty double tax payments.

What were home loan schemes?

During the 1980s, 1990s, and early 2000s, families were encouraged to establish intricate trust structures, commonly known as home loan schemes. These involved individuals, typically parents, selling their property to one trust (the house trust) in exchange for an IOU. The benefit of this IOU was then gifted to a second trust (the debt trust). Consequently, the parents could reside in the house rent-free, and the value of the house trust was minimised due to the debt owed to the debt trust. The beneficiaries of the debt trust excluded the parents, transferring the value related to the IOU payment rights to the younger generations. In essence, the scheme aimed to remove the house’s value from the parents’ estates for IHT purposes while allowing them to continue living there rent-free.

The current position

Since 2005, the Government has introduced anti-avoidance measures to counter such schemes, including Pre-Owned Asset Tax (POAT). Rather than IHT, POAT functions as an income tax charge based on the market rental value of the property. This has led to some families facing substantial annual personal income tax bills in addition to IHT on their estates.

POAT charges have caught many families off guard, resulting in significant income tax burdens instead of the expected tax-saving benefits. The situation becomes even more challenging if the scheme is left in place, leading to more substantial long-term costs.

Although HMRC has taken legal action against individuals they assert have “mistakenly” claimed IHT relief while facing POAT charges, they are now proactively encouraging people to unwind their trust-based home loan schemes, offering a way to reclaim POAT charges if done correctly.

What should people that have a home loan scheme do now?

Families affected should seek advice to consider unravelling their schemes as soon as possible. This can be an intricate process and could lead to complications related to stamp duty, capital gains tax, and income tax so expert advice is crucial to navigate the unwinding process effectively.

These schemes were not the sole domain of the extremely wealthy, however, historically the middle classes were targeted and as the country is in the midst of a cost of living crisis it is critical that families look to safeguard their financial well-being.

What was once seen as a viable tax-saving strategy has turned into a potential financial burden for families with home loan schemes. Taking proactive steps to unwind these complex trusts can protect the family’s wealth and alleviate future tax liabilities.

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Julia is a chartered tax adviser, solicitor and trust & estate practitioner. She has a wide range of experience, advising clients from both a personal and corporate tax perspective.

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Published: 7th August 2023
Area: Real Estate & Planning

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