Section 49 IHTA 1984 Does Not Attribute Trustees’ Debts to the Life Tenant: No FA 1986 s103 Abatement for Home Loan Scheme Notes

1. Introduction

In Elborne & Ors v The Commissioners for HMRC [2026] EWCA Civ 894, the Court of Appeal (Sir Launcelot Henderson giving the leading judgment, with Lady Justice Andrews and Lady Justice Asplin concurring) considered whether a pre-2006 “home loan scheme” implemented by the deceased in 2003 successfully reduced inheritance tax (“IHT”) while allowing her to remain in her home rent-free until death.

The structure was typical of the genre:

  • the home was sold at market value to trustees of a life interest settlement in exchange for an unsecured, interest-free promissory note (the “Note”);
  • the Note was then gifted to trustees of a second settlement under which the deceased was excluded from benefit (a potentially exempt transfer, “PET”);
  • the deceased continued to occupy the property rent-free under the life settlement’s occupation arrangements.

On death, section 49(1) of the Inheritance Tax Act 1984 (“IHTA 1984”) deemed the settled property within the life settlement to form part of the deceased’s estate. The planning objective was that the Note liability would reduce the IHT value of that property, and the PET would be exempt because the deceased survived seven years.

HMRC issued determinations challenging the scheme on multiple grounds. The First-tier Tribunal (“FTT”) rejected most challenges but held the Note deduction was abated to nil under section 103 of the Finance Act 1986 (“FA 1986”). The Upper Tribunal (“UT”) reversed that on section 103 and dismissed HMRC’s remaining points. HMRC appealed.

2. Summary of the Judgment

The Court of Appeal dismissed HMRC’s appeal in full and held, in substance, that the scheme “worked”.

Key holdings:

  • FA 1986 s103 (abatement of debts/incumbrances) did not apply because the Note debt was incurred by the trustees of the life settlement, not by the deceased; section 49(1) IHTA 1984 did not deem trustee liabilities to be liabilities “incurred by” the life tenant.
  • FA 1986 s102 (gifts with reservation) did not apply to the Note: the trustees of the family settlement assumed bona fide possession/enjoyment, the Note was enjoyed to the donor’s entire exclusion, and any continued occupation of the home was not a benefit “referable” to the Note nor did it affect the donees’ enjoyment of the Note.
  • Rossendale/Ramsay-type purposive construction arguments failed: HMRC’s attempt to deny the Note’s value-reducing effect by “realistic” construction of section 49(1) and/or section 5(3) was too abstract and untethered from statutory language; in any event, section 5(3) did not apply because the Note was not the deceased’s personal liability.
  • Reservation of benefit arguments about the property were neutralised by FA 1986 s102(3): the property was already within the taxable estate by section 49(1), so section 102(3) could not add anything (similarly under section 102A and the POAT election route).

3. Analysis

3.1 Precedents Cited (and Their Role)

(a) Trust liabilities as “incumbrances”: Halabi

A central building block was the Privy Council decision in Equity Trust (Jersey) Ltd v Halabi, Investec Trust (Guernsey) Ltd and others v Fort Trustees Ltd and another [2022] UKPC 36, [2023] AC 877 (“Halabi”). The Court of Appeal treated Halabi as confirming that trustees’ right of indemnity for properly incurred liabilities confers a proprietary interest (a lien/charge) over trust assets. That proprietary interest constitutes an “incumbrance” for IHT valuation purposes under section 162(4) IHTA 1984.

This anchored the conclusion that, as a matter of IHT valuation mechanics, trustee liabilities can reduce the value of trust property because they operate as an incumbrance on the trust assets.

(b) Limits of statutory deeming: Fowler and related authorities

HMRC’s primary section 103 case depended on pushing the section 49(1) deeming fiction beyond deeming beneficial entitlement to property, into attributing trustee debts to the life tenant. The Court of Appeal rejected this by applying the modern approach to deeming provisions explained in Fowler v Revenue and Customs Commissioners [2020] UKSC 22, [2020] 1 WLR 2227, drawing also on the cited line through DCC Holdings (UK) Ltd v Revenue and Customs Comrs [2011] 1 WLR 44, Inland Revenue Comrs v Metrolands (Property Finance) Ltd [1981] 1 WLR 637, Marshall v Kerr [1995] 1 AC 148, Jenks v Dickinson [1997] STC 853, and Lord Asquith’s dictum in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC109.

The Court treated Muller UK and Ireland Group LLP v HMRC [2026] EWCA Civ 248 as consistent recent authority on not extending deemings beyond their statutory purpose.

(c) Section 103’s mischief: McDougal’s Trustees

For section 103’s purpose, the Court cited the explanation in McDougal's Trustees v Lord Advocate [1952] SC 260 (estate duty predecessor): preventing “gift and loan back” devices from generating deductible debts that neutralise a chargeable estate.

However, the Court ultimately resolved section 103 on the threshold point (the debt was not “incurred by” the deceased), and expressly left open the harder question whether the consideration for the Note was “property derived from the deceased” under section 103(3).

(d) Gifts with reservation (GWR): Ingram, Buzzoni, Viscount Hood

On section 102 (GWR), the Court drew heavily on established principles:

  • Ingram v Inland Revenue Commissioners [2000] 1 AC 293 for the core idea that “property” in section 102 is the interest given, and the donor may still benefit from the underlying asset if that benefit is referable to an interest never comprised in the gift.
  • Buzzoni v HMRC [2013] EWCA Civ 1684, [2014] 1 WLR 3040 for the second-limb focus on whether the donee’s enjoyment of the gifted property is impacted by any donor benefit.
  • Viscount Hood (Executor of the Estate of Lady Diana Hood) v HMRC [2018] EWCA Civ 2405, [2018] STC 2355 for a modern synthesis and contrast with Buzzoni in land/lease contexts.

The Court also cited Commissioner for Stamp Duties of New South Wales v Perpetual Trustee Co Ltd [1943] AC 425 on “bona fide assumption” of possession/enjoyment: the donee must assume such possession/enjoyment as the nature of the gift and circumstances permit.

(e) Ramsay/Rossendale and “realistic” construction: Rossendale, Altrad, HFFX

HMRC invoked Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 to argue for a purposive construction that would prevent the scheme from working. The Court rejected the attempt to transmute section 49(1) and section 5(3) into anti-avoidance tools.

The Court located Rossendale in the broader interpretive framework discussed in Altrad Services Ltd v HMRC [2024] EWCA Civ 720, [2024] STC 1201, including the quoted formulation in Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454, while stressing the limits set out in HMRC v HFFX LLP [2026] UKSC 17: statutory purpose cannot be invoked at a level of generality that is “untethered” from the charging language.

The judgment also noted the well-known tax-avoidance quotation from Gilbert v Commissioner of Internal Revenue (1957) 248 F 2nd 399 (as previously used in WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 and Rossendale), but found it did not fit the factual/legal reality of the deceased’s genuine disposals and survival-dependent PET risk.

3.2 Legal Reasoning

(a) The decisive section 103 point: the debt was not “incurred by” the deceased

Section 103 FA 1986 abates liabilities only where (among other conditions) the liability is “a debt incurred by” the deceased or an “incumbrance created by a disposition made by” the deceased. The Court held:

  • the Note debt was incurred by the trustees of the life settlement in that capacity;
  • the mere fact the deceased was one of the trustees did not turn a trustee liability into a personal liability;
  • section 49(1) does not extend to attributing trustees’ acts/liabilities to the life tenant—its purpose is to deem beneficial entitlement to the settled property, not to rewrite the trust’s separate legal personality and incidence of debts.

The Court’s interpretive method is important: it treated HMRC’s proposed “corollary” (life tenant deemed to incur trustee debts) as neither necessary nor justified by the statutory purpose of section 49(1), and as the sort of extension that would require clear language (contrasting, for example, the express attribution drafting in section 60 Taxation of Chargeable Gains Act 1992).

Having answered the first limb against HMRC, the Court declined to decide (and left open) whether the property transferred to the trustees could also be “property derived from the deceased” for section 103(1)(a)/(3) purposes.

(b) Section 102 and the Note: no “reservation” of benefit in the gifted chose in action

HMRC attempted to characterise the donor’s continuing rent-free occupation of the home as a benefit obtained “by contract or otherwise” (including through “associated operations”) that tainted the gift of the Note.

The Court rejected this for two distinct reasons:

  1. Referability/derivation: the benefit (occupation) must be derived from the property gifted (the Note). Here, occupation rights derived from the donor’s life interest and trustee occupation decision under the life settlement—interests never comprised in the gift of the Note (consistent with Ingram).
  2. Impact on donee enjoyment: under Buzzoni, the second limb asks whether any donor benefit impacts the donee’s enjoyment of the gifted property. The donor’s occupation of the home did not affect the family trustees’ enjoyment of the Note at all.

The Court also upheld the tribunals’ conclusions that:

  • section 102(1)(a) was not engaged: the family trustees assumed such possession/enjoyment of the Note as its nature permitted;
  • the first limb of section 102(1)(b) was not engaged: the Note was held under a settlement excluding the donor, and so was enjoyed to the donor’s “entire exclusion”.

(c) Rossendale/Ramsay could not be used to deny the Note’s valuation effect

HMRC argued that, purposively construed, section 49(1) and/or section 5(3) should be read so that a liability created only to cancel out a deemed inclusion could not reduce the taxable estate.

The Court’s rejection turned on three points:

  • Statutory anchoring: HMRC’s purpose-based argument was too general and not supported by the words of section 49(1) or section 5(3) (echoing HFFX).
  • Wrong mechanism: the correct valuation route for trustee liabilities is section 162(4) (incumbrances), illuminated by Halabi; section 49(1) does not itself do the valuation work HMRC sought to manipulate.
  • Section 5(3) inapplicability: it concerns the deceased’s liabilities; this was a trustee liability.

(d) Reservation of benefit in the property: section 102(3) prevents “double entry”

HMRC’s alternative route was to argue the home itself was “property subject to a reservation” under:

  • section 102 directly,
  • section 102A (land-specific), and/or
  • the POAT election mechanism under Finance Act 2004 schedule 15 paragraph 21(2).

The Court held that all of these routes run into section 102(3)’s built-in limitation: property is only treated as part of the donor’s estate “to the extent” it would not otherwise form part of the estate. Since section 49(1) already brought the property into the estate (as settled property subject to an interest in possession created before 22 March 2006), the reservation provisions could not add anything. The live issue remained the deduction for the Note liability.

3.3 Impact

  • Clarifies the interaction between section 49(1) and anti-avoidance debt abatement: section 49(1) is not a general attribution engine. This materially constrains HMRC arguments that seek to treat trustee-incurred liabilities as if incurred by the life tenant for provisions drafted in personal-liability terms (notably section 103 FA 1986).
  • Reinforces trust-liability valuation via section 162(4) and general trust law: by treating trustees’ proprietary indemnity rights (per Halabi) as “incumbrances”, the judgment strengthens the doctrinal basis for deducting properly incurred trustee liabilities when valuing trust assets within a life tenant’s estate.
  • Limits the reach of section 102 to the interest actually gifted: continued enjoyment of the underlying asset will not taint a gift of a different asset (here, the Note) unless the benefit is referable to that gifted property and impacts the donee’s enjoyment.
  • Practical significance mainly for historic planning and legacy disputes: the Court itself stressed that the case exploited “historic” interest-in-possession treatment (highlighting the post-FA 2006 narrowing of section 49), and noted later regimes (DOTAS, GAAR, POAT) that may deter or counteract similar schemes going forward.
  • Leaves open a key section 103 question: whether, in a different fact-pattern where the debt is “incurred by” the deceased, the same asset can be both consideration for and “property derived from” the deceased for section 103(1)(a)/(3).

4. Complex Concepts Simplified

  • Interest in possession (IHTA 1984 s49(1)): where someone has a present right to the income/enjoyment of trust property, they are (for IHT) treated as owning the underlying property. This is a deeming rule about inclusion in the estate, not an all-purpose rewrite of legal ownership and liabilities.
  • Trustees’ right of indemnity / “incumbrance” (IHTA 1984 s162(4)): if trustees properly incur a debt, equity gives them a proprietary lien over trust assets to reimburse themselves. That lien burdens (“incumbers”) the trust assets, so it can reduce the value of those assets when valued for IHT.
  • Section 103 FA 1986 “abatement”: an anti-avoidance rule stopping certain debts reducing IHT where the debt is effectively funded by the deceased’s own property (classic “gift and loan back”). It only applies to debts “incurred by” the deceased (or incumbrances created by the deceased), which was fatal to HMRC here.
  • Gifts with reservation (FA 1986 s102): if a donor gives an interest away but keeps benefiting from that same interest, the gifted property can be treated as still part of the estate. The key is whether the benefit is carved out of, or impacts enjoyment of, the gifted interest.
  • Associated operations: linked steps can be analysed together, but association does not remove the need to show that the donor’s benefit is referable to the property that was gifted for section 102 purposes.
  • Ramsay / “realistic view”: courts interpret tax statutes purposively and apply them to transactions viewed realistically, but they do not rewrite clear statutory language simply because the outcome appears tax-motivated.

5. Conclusion

The Court of Appeal’s principal contribution is a disciplined demarcation of what section 49(1) IHTA 1984 does—and does not—deem. It brings life-interest trust property into the life tenant’s IHT estate, but it does not attribute trustee debts to the life tenant for anti-avoidance provisions drafted in personal-liability terms, such as section 103 FA 1986. Coupled with the valuation treatment of trustee liabilities as incumbrances (reinforced by Halabi) and orthodox GWR principles (Ingram, Buzzoni), the judgment explains why HMRC’s multi-pronged attack failed and why, on the facts found, the home loan scheme achieved its intended IHT effect.