The First-tier Tax Tribunal (FTT) has ruled that loan notes issued by a family property trust are a liability of the trust’s life tenant and therefore reduced the estate’s net value, according to the case of James Charles Pride v HMRC, 2023 UKFTT 316 TC. The late Geraldine Pride had set up a family property trust in 2002, where she was entitled to both income and capital. She transferred a rented flat worth GBP535,000 and GBP800,000 in investment bonds funded from the sale of her house to the trust. In a complex set of steps designed to indicate they were performed by the trustees, she made a loan to the property trust involving the creation of GBP5 million of loan notes indemnified by the trust and accounted for as a liability of that trust. The deceased transferred these loan notes to another trust set up for her children.
Following the deceased’s death in 2016, HMRC challenged these ‘home loan: double trust’ arrangements and argued that the value of the loan notes should not be deductible from her estate for inheritance tax (IHT) purposes. HMRC raised a GBP1.7 million IHT assessment on the estate. James Pride, the deceased’s executor and trustee, appealed this assessment to the FTT.
Pride argued that the loan note liability should not be taken into account in determining the value of the estate immediately before death, as the estate only included the net value of the property trust under s.5(3) of the Inheritance Tax Act 1984. However, the FTT disagreed and found that the loan notes were liabilities subject to s.5(3) and were therefore to be taken into account in determining the value of the estate.
Although this did not reduce the IHT due at her death, the FTT decided that the liability represented by the loan notes should be abated by 100%. The whole of the consideration given for the loan note debt consisted of property derived from the deceased. Therefore, the deductible value of the loan notes was reduced to nil. As a result, IHT was due on the value of the assets in the property trust, and no reduction for the loan note liabilities was allowed.