A family has saved £588,700 on inheritance tax after a Tax Authorities In a blunder, a staff member issued a certificate stating that no payment was due.
Jennifer Elizabeth Fleet had made arrangements shortly before her death in 2011 to reduce the value of her estate to below £325,000, the amount that anyone can leave tax-free upon death.
The elaborate tax-saving scheme worked by creating an artificial debt to reduce the value of the estate. This was discovered by the IRS, but the agency failed to recover the unpaid tax due to its own administrative shortcomings.
Mrs Fleet's sons and executors signed an inheritance tax form in October 2011 stating that the value of her assets was £1.8 million, including £1.6 million in debts, of which £1.4 million was security.
This meant that at the time of her death her estate was worth less than the £325,000 threshold, meaning her family would not have to pay inheritance tax at 40 per cent on any amounts above this value.
Jennifer Elizabeth Fleet had embarked on a plan shortly before her death in 2011 to reduce the value of her estate to below £325,000 – the amount anyone can leave tax-free upon death (file image)
However, five years later, a tax official wrote a letter to Mrs. Fleet's advisors stating that the debt was not deductible and that the estate had therefore been undervalued.
In 2018, after several postponements, her advisor filed a request for a discharge, which would have forgiven the tax debt.
Then a tax office employee – unaware that another official was handling the case – issued a certificate confirming that no inheritance tax was due.
In 2019, the responsible officer made a decision stating that the amount subject to inheritance tax was £1.4 million, meaning the family owed more than £500,000.
The sons appealed to the Court of First Instance. HMRC argued that Mrs Fleet, by entering into the scheme, had made a lifelong transfer which was immediately chargeable to Inheritance Tax.
The court acknowledged that the arrangement was “ineffective in reducing the value of Mrs. Fleet's estate for inheritance tax purposes.”
However, the Court allowed the appeal on the grounds that there had been no lifelong transfer, as the value of the guarantee was still in fact part of her estate on the date of her death.
Although the plan failed on a technical level, HMRC was unable to collect the tax.
Claire Roberts of accountancy firm Moore Kingston Smith told The Telegraph: 'This decision is yet another example of a pattern of HMRC increasingly getting the basic rules wrong.
'In this case, £500,000 of tax was lost simply because the different parts of HMRC were not communicating with each other.
'This comes at a time when HMRC is facing increasing criticism over its declining service standards, and this costly error has only added fuel to the fire.'
A spokesperson for HMRC said: 'We recognise the ruling and are pleased that the court has agreed that the scheme used does not reduce Inheritance Tax liabilities.'