The First-tier Tax Tribunal (FTT) has ruled that HMRC cannot pursue £588,700 of underpaid inheritance tax (IHT) linked to a failed tax-planning arrangement, as reported by STEP.
This decision came after an HMRC officer mistakenly issued a clearance certificate while the estate was still under investigation.
The arrangement in question was set up by Jennifer Fleet just eight days before her death on 16 May 2011. Fleet placed £20,000 into a trust for her two sons, Luis and Nicholas Carvajal, who also served as executors of her estate. The trust was further funded by a £1.4 million loan from an independent finance company, for which Fleet signed a guarantee and indemnity. The loan was drawn down the following day and credited to the trust’s account.
Upon Fleet’s death, the loan guarantee was called in, with the intention that it would be a liability of the estate, effectively reducing the IHT to zero. Shortly after, the trust distributed £700,000 to each of the two executors, leaving the trust without assets but holding a £1.4 million debt from the estate. The Carvajals then submitted an IHT400 form, reflecting this liability and aiming to eliminate any IHT obligation.
However, HMRC disputed the validity of the scheme and entered into prolonged correspondence with the executors. Meanwhile, the finance company sought repayment of the loan. In response, the executors filed an IHT30 form with HMRC, requesting a certificate of discharge for any IHT liability from the estate. They filled out the section concerning death-related liabilities but overlooked the part about lifetime transfers.
HMRC issued the clearance certificate on 11th December 2018, seemingly in error, as the officer handling the case was unaware of the discharge. In June 2019, the same officer issued notices of determination to the Carvajals for £588,700, arguing that the tax-planning scheme failed for three reasons:
The loan guarantee was not a liability of Fleet at the time of her death.
The guarantee constituted an immediately chargeable transfer of value under the Inheritance Tax Act 1984.
Fleet had the right to recover the £1.4 million under certain conditions, meaning the sum should have been considered part of her estate.
The Carvajals contested this, pointing to the clearance certificate. HMRC conceded that the certificate invalidated the first and third arguments but maintained that the second—concerning a lifetime transfer of value—was still valid, as the certificate only covered IHT arising from death.
The FTT ruled in favour of the Carvajals, finding that Fleet’s execution of the guarantee did not amount to a lifetime transfer of value for IHT purposes. Although the tax-planning arrangement ultimately failed to reduce the estate’s value for IHT, the tribunal concluded that HMRC’s mistaken issuance of the clearance certificate barred it from pursuing the remaining claims. Consequently, the appeal was allowed (Carvajal & Carvajal v HMRC, 2024 TC09248).
