Was a home loan scheme effective?

In 2003 Mrs E entered into a series of arrangement designed to reduce inheritance tax on her death. Essentially these involved setting up a trust and selling her home to the trust in exchange for a loan note. The terms of the trust allowed her to remain in her home for the rest of her life. She then gifted the loan note to her children. The transfer of the loan note was a potentially exempt transfer and if she survived seven years which she did would fall out of her estate. On her death the property would still form part of her estate as she held an interest in possession in it but it would be matched by the amount owed to her trustees under the loan note. Essentially the value of her home would escape inheritance tax on death.

HMRC disagreed with this analysis...