Unwinding Home Loan Schemes After Death

I am aware that this is a complex topic but I am particularly thinking about the potential income tax or CGT consequences after death.

The home loan scheme is fairly standard:

  • in 2003 the deceased (D) sold the property to Trust 1 (life interest trust for D) for £350,000 in return for an IOU.
  • D then assigned the IOU to Trust 2 (life interest trust for D’s children, excluding D from benefit).

The IOU states that the holder may recall the loan after death, and they have discretion to treat the debt as any of the following: (a) £350,000, (b) £350,000 plus RPI, © the market value of the IOU at the date of issue.

The home is now valued at roughly £800,000. The executors are minded to accept HMRC’s view regarding IHT that the value of the loan will be a GWR and the excess value of the home will aggregate as a life interest.

Am I correct that:
(A) if the trustees of Trust 2 decide to treat the loan as only £350,000 there will be no Income Tax or Capital Gains Tax charge on repayment.
(B) Trust 1 is entitled to PPR relief on the sale of the property since D occupied it throughout the period.

I am aware that there is an argument about whether index-linking leads to Income Tax or CGT but I hope that question will be moot.

Many thanks in advance

Tobias Gleed-Owen
Hewitsons LLP