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A family has managed to avoid an inheritance tax bill of almost £600,000 due to admin errors by the taxman.
A complex financial manoeuvre was used that made the value of an estate appear less than it was really worth.
The step appeared to bring down the headline value of the estate to less than £325,000, which is the point at which the “death tax” begins to be levied at 40 percent.
A tribunal has now ruled that the step was not allowed – however, admin failures at HMRC in the handling of this specific case meant that the family will not be required to pay the punishing IHT bill.
The case involved Jennifer Elizabeth Fleet, who entered into a complex tax-saving scheme not long before her death in 2011.
The scheme worked by effectively creating an artificial debt that brought the value of her estate below the nil-rate inheritance tax band of £325,000.
In October 2011, Mrs Fleet’s sons and executors signed an inheritance tax form stating that the value of her assets was £1.8m. However, they stated that this figure was offset by liabilities against the estate of £1.6m, including a debt guarantee for £1.4m.
In theory, this meant that at the time of death the woman’s estate was worth less than £325,000, which meant her family escaped paying any IHT.
Five years later, an HMRC officer wrote to Mrs Fleet’s advisers stating that the debt was not deductible, and therefore the estate had been undervalued.
There were then a number of delays until eventually in 2018, her adviser applied for a certificate of discharge which would wipe out the tax liability.
The HMRC officer in charge of the case insisted that an IHT charge should be paid. However, a second official then issued a certificate confirming that no inheritance tax was due.
The confusion continued when in 2019, the officer in charge issued a determination saying the amount liable to inheritance tax was around £1.4m, generating an IHT bill of some £588,700.
The sons then appealed against having to make the payment to a tax tribunal. It subsequently ruled that the move could not be used to alter the size of the estate and avoid paying IHT.
However, it said while the appeal had failed on a technical level, the errors in the handling of the case meant the HMRC should not be allowed to collect the tax.
Claire Roberts, of accountancy firm Moore Kingston Smith, told the Telegraph: “This decision is the latest in an increasingly common pattern of HMRC getting the basics wrong.
“In this case, £500,000 of tax was lost simply because different parts of HMRC did not speak to each other.
“This comes at a time when HMRC is facing growing criticism for their falling service standards and this costly mistake will add fuel to the fire.”
An HMRC spokesman said: “We acknowledge the ruling and welcome the tribunal’s agreement that the scheme used does not reduce inheritance tax liabilities.”