Key takeaways
Government acts after court defeat
The successful Elborne planning outcome has prompted proposed legislative change.
Trust liabilities under new pressure
Future inheritance tax relief for trust debts may be significantly restricted.
Review existing planning now
Families should assess affected structures before the new rules take effect.
One of the more technical Inheritance Tax measures announced in the 2026 Budget may have significant implications for certain trust-based planning arrangements. While affecting a relatively small number of taxpayers, the measure appears to be a direct response to the recent Court of Appeal decision in Elborne -v- HMRC and could have important consequences for existing trust structures that rely on liabilities reducing the value subject to inheritance tax.
Why has this change been announced?
The announcement comes only a few months after the Court of Appeal's decision in Elborne -v- HMRC, a case concerning a historic form of inheritance tax planning commonly known as a ‘home loan’ scheme.
In broad terms, the planning involved a homeowner transferring their property into trust in return for a legally enforceable promise from the trustees to pay the value of the property, while retaining the right to continue living in the property. That right to payment was then transferred into a separate trust for the benefit of the next generation. The result was that the value of the property and the corresponding debt were effectively separated, producing a favourable inheritance tax outcome.
The court held that the arrangement achieved the intended tax result under the legislation then in force, commenting that ‘in simple language, the scheme worked’.
A key feature of the planning was that the debt owed by the trust could be taken into account when calculating the inheritance tax value of the property.
What is changing?
The existing inheritance tax legislation contains detailed rules restricting the deductibility of liabilities for individuals but does not expressly deal with liabilities incurred by trustees.
The government intends to change this by introducing legislation that will:
provide a specific statutory framework for liabilities incurred by trustees
bring those liabilities within the wider inheritance tax liabilities regime
apply equivalent debt-deduction restrictions where individuals are treated as owning trust property for inheritance tax purposes
prevent liabilities linked to value originating from a beneficiary's own estate from being used to reduce inheritance tax charges in circumstances that the government considers inconsistent with the intended operation of the legislation.
The new rules are intended to apply to transfers of value and inheritance tax chargeable events (including death of a taxpayer) occurring on or after 28 October 2026.
What does this mean for Elborne-style planning?
Although the Budget papers do not specifically mention Elborne, it is difficult to ignore the connection. The policy paper refers to concerns that liabilities associated with settled property can reduce inheritance tax charges in ways that were not intended by the legislation and create opportunities for avoidance.
Based on the information currently available, the government appears to be seeking to ensure that trust liabilities are subject to the same anti-avoidance restrictions that already apply elsewhere in the inheritance tax code. The legislation is likely to make it much harder for arrangements similar to those considered in Elborne to achieve the same inheritance tax outcomes in the future.
Is this a retrospective change?
The government is not attempting to overturn the court's interpretation of the schemes implemented under historical legislation. However, it is proposing to amend the law going forward following the taxpayer's success in the litigation and it will affect the estates of taxpayers who die after 28 October 2026.
What should clients be doing now?
At this stage, the announcement is a policy paper rather than detailed legislation, so there remain a number of unanswered questions. The precise scope of the changes, and their application to existing structures should become clearer when the relevant provisions of the Finance Bill 2026-27 are published.
Nevertheless, trustees, settlors and beneficiaries should consider:
whether any existing planning depends on the deductibility of trust liabilities
whether future inheritance tax chargeable events could occur after 28 October 2026
whether assumptions made when the planning was implemented remain valid in light of the proposed changes
whether any action should be taken once draft legislation becomes available.
Looking ahead
While this is a relatively targeted measure, it provides an interesting example of how the government responds to taxpayer victories in the courts. The Court of Appeal confirmed that the planning in Elborne was effective under the legislation then in force. The Budget announcement suggests that parliament now intends to ensure similar results cannot be achieved in the future.
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