Mark Elborne & Ors v The Commissioners for HMRC

Trust liabilities properly incurred give trustees a proprietary indemnity which reduces the inheritance tax value of the settled property. Deeming an interest-in-possession beneficiary beneficially entitled to that property does not attribute the trustees’ debts to the beneficiary personally. A gifted promissory note can be genuinely possessed and enjoyed despite repayment being deferred until after the donor’s death. A reservation of benefit requires a substantial causal connection between the gift and the donor’s benefit, and an impact on the donee’s enjoyment. Associated operations do not remove those requirements. Purposive interpretation must remain anchored in the statutory language and identifiable legislative purpose. Gifts-with-reservation provisions do not duplicate the inclusion of property already forming part of the donor’s taxable estate.

Mrs Elborne owned and occupied a residential property. To reduce inheritance tax, she established a life settlement under which she had an interest in possession. She contracted to sell the property to its trustees, comprising herself and her solicitor, for £1.8 million. The purchase price was satisfied by an unsecured, interest-free promissory note, principally repayable after her death. The trustees permitted her to remain in occupation rent-free.

Mrs Elborne subsequently assigned the note by way of gift to the trustees of a family settlement benefiting her three children. That settlement excluded her and her husband from all benefit. The intended effect was to include the property in her estate through her life interest, while deducting the trustees’ liability under the note. The gift of the note was intended to become exempt after seven years. The tribunals found that the scheme documents were intended to operate according to their terms.

Following Mrs Elborne’s death, HMRC issued inheritance tax determinations to her executors and the settlement trustees. The First-tier Tribunal dismissed their appeals solely because section 103 of the Finance Act 1986 prevented deduction of the note liability: [2023] UKFTT 626 (TC). The Upper Tribunal reversed that conclusion and dismissed HMRC’s cross-appeal: [2025] UKUT 00059 (TCC). HMRC appealed on debt abatement, reservations of benefit, purposive statutory interpretation and the effect of a pre-owned assets election.

1. Appeal dismissed unanimously. Sir Launcelot Henderson, with Andrews and Asplin LJJ agreeing, held that the scheme achieved its intended inheritance tax treatment. The Upper Tribunal’s decision was upheld.

2. Trustees’ indemnity for liabilities properly incurred in administering a trust gives them a proprietary interest in the trust assets. Following Halabi, [2022] UKPC 36, that interest constituted an incumbrance under section 162(4) of the Inheritance Tax Act 1984. The note liability therefore reduced the property’s taxable value. Section 5(3), which concerns the liabilities of the person whose estate is valued, supplied no alternative basis for treating the trustees’ debt as Mrs Elborne’s personal liability.

3. Section 49(1) deemed Mrs Elborne beneficially entitled to the underlying settled property. Its purpose did not extend to attributing the trustees’ acts or debts to her personally. Such an extension required clear statutory language. Consequently, the note was not a debt incurred by her for section 103 of the Finance Act 1986, and abatement could not apply. Whether the consideration was property derived from the deceased was left open. Neither tribunal’s reasoning on that question was endorsed or disapproved.

4. The family trustees assumed bona fide possession and enjoyment of the note to the extent its nature and terms permitted. Deferred repayment did not prevent that enjoyment. Mrs Elborne’s complete exclusion from the family settlement also answered the first limb of section 102(1)(b).

   The second limb required a substantial causal connection between the gifted property and the donor’s benefit. Following Ingram, [2000] 1 AC 293, occupation arising from a separate retained interest did not constitute a benefit reserved from the note. Applying Buzzoni, [2013] EWCA Civ 1684, the benefit also had to affect the donee’s enjoyment. Mrs Elborne’s occupation had no such effect. Associated operations extended the expression by contract or otherwise; they did not displace these requirements.

5. The Ramsay approach required purposive construction applied to realistically assessed transactions. A wider construction required a safely identifiable statutory purpose and necessity to prevent frustration of Parliament’s intention. HMRC’s proposed restriction was too abstract and unsupported by the statutory language. The transactions genuinely changed Mrs Elborne’s beneficial interests. Her gift of the note would have been taxable as a failed potentially exempt transfer had she died within seven years.

6. Section 102(3) operated only to the extent property was otherwise outside the donor’s estate. The property was already included through section 49(1). Neither section 102A nor the pre-owned assets election produced additional inclusion or resolved the separate valuation question differently. Whether the property disposal was by way of gift was therefore unnecessary to decide. The result concerned the historic treatment of interests in possession; the court noted that a later general anti-abuse rule could in principle counteract schemes of this type.

• Court of Appeal: [2026] EWCA Civ 894 . HMRC’s appeal was dismissed unanimously, upholding the Upper Tribunal’s decision.
• Upper Tribunal (Tax and Chancery Chamber): [2025] UKUT 00059 (TCC); [2025] STC 394. The Elborne parties’ appeal on section 103 of the Finance Act 1986 was allowed. HMRC’s cross-appeal on the remaining issues was dismissed. The appeals against the determinations accordingly succeeded.
• First-tier Tribunal (Tax Chamber): [2023] UKFTT 626 (TC); [2024] SFTD 21. The Elborne parties’ appeals were dismissed solely because section 103 of the Finance Act 1986 required the note liability to be abated to nil. HMRC’s other grounds were rejected.