What is a home loan tax avoidance scheme, and what to do if you have used it
Loan schemes have been named as โdisguised remunerationโ schemes by HM Revenue & customs. HMRC claims that these schemes are generally used by individuals to dodge liable taxes and National Insurance Contributions (NIC).ย
HMRC has never really approved these schemes and has actively opened numerous enquiries since the introduction of these schemes. Due to HMRCโs action, the use of loan schemes has been widely discouraged among individuals living in the UK.
The Home loan scheme was designed to target taxpayers whose estates surpassed the nil rate band for tax purposes. The purpose of the scheme was to completely remove the value of the property while dodging the gift with reservation of benefits provision, this enabled the owner to avoid capital gains, IHT and stamp duty charges while living in the property without paying any rent.
What is the current status of the Home loan tax avoidance scheme (HLS)?
As none of the HLS cases has been taken to court up until now, there has been no ruling given against its working yet.
A number of settlements have been reached by HMRC. Institute of Chartered Accountants in England and Wales (ICAEW) have requested HMRC to provide an explanation for how the settlements have been agreed, in favour of those wanting to avoid legal action.
In response, HM Revenue & customs have provided guidance on unwinding the home loan tax avoidance scheme (HLS) in their Inheritance tax (IHT) manual.
If you are unsure about how this scheme works or how to safely settle if you have used this scheme, we advise speaking to an accountant or confirming the next steps with your current accountants.
Overview of HLS:
We have provided below a short outline of what the Home loan tax avoidance scheme (HLS) is and what was its purpose.
- HSL was designed as a strategy to prevent inheritance taxation (IHT) on inheritance or the passing of a family home.
- According to the scheme, you would need to sell a property into a trust while creating an alternative loan according to the value of the home on the last settlorโs death.
- The owners could continue to live in the property without paying Stamp duty, capital gains tax and inheritance tax charges.
- Gifts with reservation provisions (GWR) were avoided by using the scheme.
- Pre-owned assets tax (POAT) was introduced in response to the issues that were arising because of the home loan scheme and the failure of (GWR) provisions.
- The POAT had somewhat of an ex post facto effect and enforced income tax charges on the individuals who were benefiting from properties they had previously sold off but were still living in them.
- The asset was kept away from the inheritance tax burden once the POAT was paid.
If you have used HLS and are not sure what potential impacts it can have on you, we recommend speaking to an accountant immediately to avoid any major tax implications.
What is the position of HMRC in this matter?
The following points highlight HMRCโs take on this matter:
- HLS schemes have been challenged by HMRC through different legal strategies.
- These strategies are aimed at bringing back the loan, the house, or both within the Gifts with Reservation provision (GWR).
- On the death of the settlor, executors and trustees are now being confronted with paying Inheritance tax (IHT), and there is a chance they might be charged double as a result of the strategies introduced by HMRC.
- If HMRC succeeds in its prosecution and is victorious then the scheme will have failed, as a result, the individuals who have already paid POAT to avoid Inheritance tax (IHT) will still be charged with IHT anyways.
If you have tried to settle using POAT but are now being picked up for prosecution by HMRC to pay IHT, you need to speak to an accountant immediately to come up with a plan of action.
What if a settlement has been made with HMRC?
HMRC has recommended the following for the settlors:
- HMRC will not proceed to charge more than the payable amount of IHT say if the property was to remain within the Inheritance tax (IHT) estate, this is if the executors and trustees are seeking to settle with HMRC.
- HMRC will continue to abide by this even if the tribunal increases the charge; this is solely for the settlers.
- The executors have the option of settling by bringing the value of the house back into the death estate, the POAT paid will be refunded back to the estate, and the credit for the tax which has been paid will be offset against the IHT payable, so the executors do not actually have to claim the POAT back.
- If one settlor out of two dies and the other survives, a reservation of benefit will arise in each half of the house, this means half of the house will be taxable on the first spouse the remaining half on the second. A joint property discount will not be provided.
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