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Elborne & Ors v The Commissioners for HMRC

Smart Summary

Factual and Procedural Background

This appeal concerned whether a 2003 scheme (a "home loan" style arrangement) implemented by the deceased ("the Donor") removed The Property from her taxable estate while allowing her to occupy it rent-free until her death on 6 January 2011. The scheme involved (a) sale of The Property by the Donor to the trustees of Settlement A in exchange for an unsecured promissory note (the Note) issued by those trustees, (b) assignment by the Donor of the Note as a gift to the trustees of Settlement B (from which the Donor was excluded), and (c) the Donor's continued residence rent-free, with survival beyond seven years after the gift. HMRC issued notices of determination in February 2017. The Respondents appealed to the First-tier Tribunal (FTT), which largely rejected HMRC but held that section 103 FA 1986 required abatement of the Note liability to nil. The Upper Tribunal (UT) allowed the Respondents' appeal on the section 103 point and dismissed HMRC's cross-appeal. HMRC obtained partial permission to appeal to the Court of Appeal. The Court of Appeal heard argument and delivered the approved judgment dismissing HMRC's appeal.

Legal Issues Presented

  1. Whether the liability under the Note was a debt incurred by the deceased such that it was subject to abatement under section 103 of the Finance Act 1986 ("the section 103 abatement issue").
  2. Whether the Note itself was comprised in the deceased's estate as "property subject to a reservation" under section 102 FA 1986 ("the section 102 reservation of benefit in the Note issue").
  3. Whether, applying the Ramsay/Rossendale approach, the liability under the Note should be disregarded for IHT valuation under sections 49(1) or 5(3) IHTA 1984.
  4. Whether The Property was "property subject to a reservation" under section 102 FA 1986, section 102A FA 1986, or by election under the POAT provisions (schedule 15 FA 2004) ("the reservation of benefit in The Property issues").

Arguments of the Parties

Appellant's Arguments

  • Section 103 FA 1986 applied: the Note liability should be treated as a debt of the deceased (via section 49(1) deeming) and abated because the consideration for the liability consisted of property derived from the deceased.
  • The Note was "property subject to a reservation" under section 102 FA 1986, so it formed part of the deceased's estate.
  • Alternatively, the Ramsay/Rossendale interpretative approach required construing sections 49(1) or 5(3) so the Note liability did not reduce the deceased's estate.
  • The Property itself was subject to reservation under section 102, section 102A or by virtue of a POAT election.

Respondents' Arguments

  • The Note liability was incurred by the trustees of Settlement A, not by the deceased personally, and section 49(1) does not deem trustee-incurred liabilities to be debts of the beneficiary.
  • The Note, once assigned, was enjoyed by Settlement B to the exclusion of the Donor and the assignment was bona fide; section 102 did not apply to bring the Note into the Donor's estate.
  • Ramsay/Rossendale did not justify departing from the statute's ordinary meaning; the scheme fell within the historic IHT treatment of interests in possession.
  • The POAT election and section 102(3) meant that issues about reservation in relation to The Property were academic or otherwise resolved in favour of the Respondents.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Pearson v Inland Revenue Commissioners [1981] AC 753 Defines "interest in possession" as a present right to present enjoyment of property. Used to explain the nature of the life interest held by the Donor under Settlement A for IHT purposes.
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") Trustees have a proprietary right of indemnity that creates an incumbrance on trust property enforceable in equity. Cited as authoritative to conclude that trustee liabilities constitute an incumbrance under section 162(4) IHTA 1984 and thus reduce the value of trust property for IHT purposes.
St Barbe Green and another v Inland Revenue Commissioners [2005] EWHC 14 (Ch), [2005] STC 288 Considered whether a deceased's personal insolvency could reduce value of settled property for IHT; held personal debts deductible only from personal estate. Court treated the decision as peripheral to the present issues and noted it post-dated neither Halabi nor fully addressed trust-incurred liabilities in the present context.
Fowler v Revenue and Customs Commissioners [2020] UKSC 22, [2020] 1 WLR 2227 Guidance on interpreting statutory deeming provisions: ascertain purposes and limit the fiction to avoid absurdity. Applied to interpret section 49(1) IHTA 1984; court held deeming should not be extended to treat trustee acts as acts of the beneficiary absent clear language.
Muller UK and Ireland Group LLP v HMRC [2026] EWCA Civ 248 Recent Court of Appeal guidance on construction of deeming provisions (cited for principle). Cited as supporting authority for principles limiting the reach of statutory deeming.
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 Collected dicta on interpretation of deeming provisions and their proper limits. Referenced via Fowler as background guidance on construing deeming provisions like section 49(1).
East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109 Illustration that once a fiction is prescribed by statute, its corollaries should not be avoided unless absurd. Quoted in support of the general approach to statutory fictions but distinguished as not justifying the extensive deeming sought by HMRC.
McDougal's Trustees v Lord Advocate [1952] SC 260 Explains mischief addressed by predecessor to section 103: prevent circular devices where property given is lent back to donor to avoid duty. Used to clarify the purpose of section 103 FA 1986 when assessing HMRC's abatement argument.
Ingram v Inland Revenue Commissioners [2000] 1 AC 293 Policy of section 102 FA 1986: a donor who retains benefits may preserve them only if referable to a precisely retained proprietary interest. Applied to assess whether the donor's continuing occupation was a benefit referable to the Note or to an interest retained in The Property.
Lang v Webb 13 C.L.R. 503 Early articulation of policy behind reservation rules (cited in Ingram). Referred to in explaining the policy of section 102.
Viscount Hood (Executor of the Estate of Lady Diana Hood) v HMRC [2018] EWCA Civ 2405, [2018] STC 2355 Recent review of section 102 jurisprudence and analysis of when retained benefits constitute reservations. Referred to for context and prior analysis of reservation cases.
Commissioner for Stamp Duties of New South Wales v Perpetual Trustee Co Ltd [1943] AC 425 Defines "bona fide beneficial possession and enjoyment" in relation to gifts. Cited to support conclusion that Settlement B possessed and enjoyed the Note to the extent permitted by its nature.
Buzzoni v HMRC [2013] EWCA Civ 1684, [2014] 1 WLR 3040 Second limb of section 102(1)(b) focuses on whether the donee's enjoyment of the gifted property is to the exclusion of the donor. Applied to hold that the donor's occupation did not impact Settlement B's enjoyment of the Note; therefore section 102(1)(b) did not apply.
WT Ramsay Ltd v Inland Revenue Commissioners [1982] AC 300 ("Ramsay") Establishes a purposive, realistic approach to statutory interpretation in avoidance schemes. Cited as the line of authority defining the Ramsay principle; court held it did not require disregard of statutory language in this case.
Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690 ("Rossendale") Supreme Court restatement allowing wider constructive readings of statutory provisions where necessary to give effect to Parliament's intention. Cited by HMRC; court considered and rejected application of Rossendale to broaden sections 49(1) or 5(3) in the present facts.
Altrad Services Ltd v HMRC [2024] EWCA Civ 720, [2024] STC 1201 Court of Appeal discussion of Ramsay and purposive approach to transactions viewed realistically. Referred to for exposition of Ramsay-line principles and their limits; court relied on that analysis in rejecting HMRC's Ramsay-based submissions.
Collector of Stamp Revenue v Arrowtown Assets Ltd (2003) 6 ITLR 454 Quoted on the driving principle of the Ramsay line: purposive construction and realistic analysis of facts. Quoted in support of the general Ramsay analytical framework; court applied framework but found it did not alter statutory meaning here.
HMRC v HFFX LLP [2026] UKSC 17 Recent Supreme Court authority on limits to abstract appeals to purpose in interpreting tax provisions. Cited to support the proposition that purposive appeals must be tethered to statutory language; used to reject overbroad purposive arguments.
Gilbert v Commissioner of Internal Revenue (1957) 248 F 2nd 399 Judicial observation (US) about tax-avoidance schemes and substance of transactions, cited in Ramsay and Rossendale context. Referred to by HMRC; court rejected the contention that the scheme left the donor's beneficial interest essentially unchanged.

Court's Reasoning and Analysis

The Court's reasoning was delivered principally by Judge Henderson and adopted by the other members of the court. The key steps were:

  • Statutory framework: The court set out IHTA 1984 sections 1, 3, 4, 5(3), Part III (section 49(1)) and valuation provisions (section 162(4)), and the relevant FA 1986 provisions (sections 102 and 103).
  • Trust liabilities and valuation: Relying on Halabi, the court held that trustees' proprietary right of indemnity creates an incumbrance on trust property within the meaning of section 162(4), so trustee-incurred liabilities ordinarily reduce the value of trust property for IHT.
  • Deeming in section 49(1): The court analysed the proper scope of the deeming: it treats a person with an interest in possession as beneficially entitled to the underlying trust property for IHT, but it does not, absent clear statutory language, extend to treating trustees' acts and liabilities as acts or debts of the beneficiary personally. Fowler and related authorities were applied to limit the fiction to its intended purposes and to avoid absurd or unjust extensions.
  • Application to section 103 FA 1986: Section 103 applies only if (i) the deceased incurred the debt or created the incumbrance and (ii) the consideration for that liability consisted of "property derived from the deceased". The court concluded the Note liability was incurred by the Life Trustees, not by the deceased, so section 103 did not apply. The court left open the secondary question whether the consideration was "property derived from the deceased".
  • Section 102 FA 1986 issues as to the Note: The court held the Note was enjoyed by Settlement B to the entire exclusion of the Donor and that the assignment was bona fide; the second limb of section 102(1)(b) did not apply because the Donor's residence derived from Settlement A and the trustees' permission, not from the Note given to Settlement B, and the donee's enjoyment of the Note was not impacted by the Donor's occupation.
  • Ramsay/Rossendale argument: The court acknowledged the purposive Ramsay approach but concluded it could not be used to read sections 49(1) or 5(3) so as to disapply ordinary statutory language in the absence of a clear textual basis; applying Rossendale would have required identifying a statutory provision that could safely bear a wider meaning—no such need arose here.
  • Reservation issues as to The Property: Section 102(3) (and section 102A/POAT election) meant that to the extent The Property already formed part of the Donor's estate by virtue of section 49(1) there was no additional benefit to be obtained by treating it as property subject to reservation; the UT's reasoning on this point was accepted.

Holding and Implications

DISMISSED — The Court of Appeal dismissed HMRC's appeal.

Direct effect: the UT's decision in favour of the Respondents is upheld; the scheme's tax treatment as applied by the UT stands (the scheme "worked" in the Court's words). The court did not expand deeming provisions or reframe statutory language under Ramsay/Rossendale to bring trustee-incurred liabilities within the deceased's personal debts for section 103 purposes. The judgment does not purport to create a new general rule beyond the statutory and precedential framework applied; broader legislative or anti-abuse mechanisms were noted as subsequently enacted and therefore not applicable to the transactions dated 2003.

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Elborne & Ors v The Commissioners for HMRC

Contains public sector information licensed under the Open Justice Licence v1.0.

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Elborne & Ors v The Commissioners for HMRC
(Jul 13, 2026)