Household avoids paying nearly £600,000 in inheritance tax after HMRC error

As part of this initiative, artificial debt was created which lowered the value of their estate below the nil-band rate, The Telegraph reports.

Even though the scheme was recognised by HMRC, the tax authority did not ask for any tax to be paid back.

After Fleet's death, her sons and executors completed an IHT form which cited the value of their assets came to £1.8million.

Of this amount, £1.6milllion was in liabilities while £1.4milllion was the guarantee.

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By the time of her death, Fleet's estate was determined to be under the £325,000 threshold which meant her family were not slapped with a 40 per cent tax charge.

However, her family were informed by HMRC five years later that this artificial debt was not deductible.

After a number of delays, the family's financial advisor applied for a discharge certificate which would, if approved, wipe out all her inheritance tax liability.

Despite another HMRC officer claiming no IHT was due, the officer in charge levied a £588,000 bill at the family.

Fleet's sons appealed to the first-tier tribunal on the groups there had been no lifetime transfer of the estate due to the guarantee's value staying with her estate till death.

HMRC put forward the argument that the estate was part of a lifetime transfer which made it liable for IHT.

The tribunal found that scheme was "ineffective in reducing" the estate's value but accepted the appeal that no lifetime transfer was made.

Claire Roberts, a tax partner at Moore Kingston Smith, outlined why this case was successful in front of the tribunal.

She explained: "In this case, £500,000 of tax was lost simply because different parts of HMRC did not speak to each other."

An HMRC spokesman said:“We acknowledge the ruling and welcome the tribunal’s agreement that the scheme used does not reduce inheritance tax liabilities.”

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Who pays inheritance tax?

This levy is charged on estates of who have passed away at a rate of 40 per cent if their property, savings and possessions.

Estates are liable to pay inheritance tax if they are worth more £325,000.

Households can avoid paying this charge if the estate is worth less than this or anyone above the threshold is gifted to a spouse, partner or charity.

Notably, the IHT can be slashed to 36 per cent if someone leave certain assets if you leave 10 per cent or more of the "net value" to charity in their will.