Insight from the Upper Tribunal on a ‘debt incurred’.
In the recent decision in The executors of L Elborne deceased and others v HMRC [2025] UKUT 59 (TCC) (reported in Tax Journal, 28 February 2025), the Upper Tribunal (UT) set aside the FTT’s decision. The UT decided that, to put it simply, the ‘home loan scheme/double trust scheme’ was effective. The judgment is the first of its kind to go to the UT, as cases within this arena had previously only reached the FTT.
The case concerned Mrs Elborne entering into such a scheme in 2003 (as many others did during this time), which involved the transfer of her home into a trust in exchange for a ‘note’ which she subsequently gifted to another trust. On her death, her executors sought to deduct the liability under the note when valuing her estate for IHT purposes. HMRC challenged this arrangement, arguing that the liability should be abated to nil under FA 1986 s 103. The FTT had ruled in favour of HMRC on this main issue, deciding that the liability under the note was a ‘debt incurred by’ Mrs Elborne and, therefore, was subject to the restrictions in s 103.
However, the UT disagreed with the FT and allowed the appeal. Some key points from the UT’s judgment are as follows:
What is meant by a ‘debt incurred’ under s 103? The UT focused on whether the liability under the promissory note should be treated as a debt incurred by Mrs. Elborne. The UT rejected the FTT’s reasoning that the liabilities of a settlement should automatically be treated as liabilities of the holder of an interest in possession: ‘We are not persuaded that the deeming in [IHTA 1984 s 49(1)] requires that the holder of the interest in possession be treated as personally liable for the debts of the settlement.’ Thus, emphasising that the liabilities of the trust do not extend to be treated as liabilities of the deceased personally.
Was the consideration for the debt ‘property derived from’ Mrs Elborne within the meaning of s 103(3) for s 103(1)(a)? HMRC had also argued that the consideration for the note was ‘property derived from the deceased’ within the meaning of s 103, justifying the abatement of the liability. The UT rejected this, finding that: ‘s 103(1) requires the identification of the consideration given for the relevant debt, and we have concluded that it is a consequence of this when considering the application of s 103(1)(a), that prior dispositions of property by the deceased will be treated differently.’
HMRC’s cross-appeal and other issues: HMRC had cross appealed on several additional grounds, including the application of FA 1986 ss 102 and 102A, the impact of an election made by Mrs Elborne, and the applicability of the Rossendale issue. The UT dismissed all of HMRC’s cross-appeals.
Implications and what’s next? The decision is highly significant for many dealing with the aftermath of the ‘home-loan’ schemes and what to do next. It sets out an interpretation of these schemes and their workability, unlike one that has been seen before. However, its determinative value for the schemes and the taxpayer should be approached with caution, as it is most likely that HMRC will appeal the decision and, as always, the facts are highly important to the analysis in each individual case.
Home >Articles > Home loan schemes: lessons from Elborne
Home loan schemes: lessons from Elborne
Insight from the Upper Tribunal on a ‘debt incurred’.
In the recent decision in The executors of L Elborne deceased and others v HMRC [2025] UKUT 59 (TCC) (reported in Tax Journal, 28 February 2025), the Upper Tribunal (UT) set aside the FTT’s decision. The UT decided that, to put it simply, the ‘home loan scheme/double trust scheme’ was effective. The judgment is the first of its kind to go to the UT, as cases within this arena had previously only reached the FTT.
The case concerned Mrs Elborne entering into such a scheme in 2003 (as many others did during this time), which involved the transfer of her home into a trust in exchange for a ‘note’ which she subsequently gifted to another trust. On her death, her executors sought to deduct the liability under the note when valuing her estate for IHT purposes. HMRC challenged this arrangement, arguing that the liability should be abated to nil under FA 1986 s 103. The FTT had ruled in favour of HMRC on this main issue, deciding that the liability under the note was a ‘debt incurred by’ Mrs Elborne and, therefore, was subject to the restrictions in s 103.
However, the UT disagreed with the FT and allowed the appeal. Some key points from the UT’s judgment are as follows:
What is meant by a ‘debt incurred’ under s 103? The UT focused on whether the liability under the promissory note should be treated as a debt incurred by Mrs. Elborne. The UT rejected the FTT’s reasoning that the liabilities of a settlement should automatically be treated as liabilities of the holder of an interest in possession: ‘We are not persuaded that the deeming in [IHTA 1984 s 49(1)] requires that the holder of the interest in possession be treated as personally liable for the debts of the settlement.’ Thus, emphasising that the liabilities of the trust do not extend to be treated as liabilities of the deceased personally.
Was the consideration for the debt ‘property derived from’ Mrs Elborne within the meaning of s 103(3) for s 103(1)(a)? HMRC had also argued that the consideration for the note was ‘property derived from the deceased’ within the meaning of s 103, justifying the abatement of the liability. The UT rejected this, finding that: ‘s 103(1) requires the identification of the consideration given for the relevant debt, and we have concluded that it is a consequence of this when considering the application of s 103(1)(a), that prior dispositions of property by the deceased will be treated differently.’
HMRC’s cross-appeal and other issues: HMRC had cross appealed on several additional grounds, including the application of FA 1986 ss 102 and 102A, the impact of an election made by Mrs Elborne, and the applicability of the Rossendale issue. The UT dismissed all of HMRC’s cross-appeals.
Implications and what’s next? The decision is highly significant for many dealing with the aftermath of the ‘home-loan’ schemes and what to do next. It sets out an interpretation of these schemes and their workability, unlike one that has been seen before. However, its determinative value for the schemes and the taxpayer should be approached with caution, as it is most likely that HMRC will appeal the decision and, as always, the facts are highly important to the analysis in each individual case.
