In Carvajal & Carvajal v HMRC (2024 TC09248), the First-tier Tax Tribunal (FTT) has prevented HMRC from pursuing £588,700 of underpaid inheritance tax (IHT) resulting from a failed IHT-planning arrangement, because an HMRC officer erroneously issued a clearance certificate to the executors while another was still investigating the estate. Oooops!
The arrangement was created by Jennifer Fleet (the deceased) on 16 May 2011, a mere eight days before her death. She settled £20,000 into a trust whose beneficiaries were her two sons and executors (the appellants). The trust was also to receive a £1.4million term loan facility from an independent finance company, for which the deceased signed a guarantee and indemnity to the finance company. The loan was drawn down by the trustees the following day and credited to their client deposit account for the trust.
On the deceased’s death the guarantee was called in, with the intention that it would be a liability on her estate so that no IHT would be payable. A few days later, the trust made capital distributions of £700,000 each to the appellants, leaving the trust with no assets, although naturally it was owed over £1.4 million by the estate. Later in 2011, the two appellants submitted an IHT400 noting this liability, which nominally reduced the estate’s IHT liability to zero.
HMRC did not accept that the scheme worked and began a lengthy correspondence with the appellants. In the meantime, the finance company began to request repayment of the money it was owed.
This led the appellants to submit a IHT30 form to HMRC applying for a certificate of discharge in relation to the IHT liability arising on the deceased’s death. They completed section A of the form applying to liability arising on death but ignored section B relating to lifetime transfers.
HMRC received the application on 30 November 2018 and issued a certificate of discharge on 11 December 2018, apparently in error. The HMRC officer who was dealing with the case was not told of this, and in June 2019 she issued the appellants with notices of determination for £588,700.
The IHT avoidance scheme did not work, the officer said, on the basis of three contentions:
- the guarantee was not a liability of the deceased immediately before her death;
- the giving of the guarantee was an immediately chargeable transfer of value for the purposes of s.2(1) and s.3(1) of the Inheritance Tax Act 1984; and
- the deceased had a right to recover the GBP1.4 million under certain circumstances, and so sum formed part of her estate immediately before her death.
The appellants challenged this, citing their clearance certificate. HMRC agreed that this removed their liability on the first and third grounds but not the second. HMRC continued to pursue this second contention on the grounds that it was not covered by the clearance certificate, which only related to IHT arising on death. The appellants continued to resist, arguing that the giving of the guarantee did not constitute a lifetime transfer of value.
The FTT ruled that the deceased did not make a transfer of value for IHT purposes by simply executing a guarantee under the tax planning arrangements. Nevertheless, the arrangements were ineffective in reducing the value of the estate for IHT purposes. The deceased’s subrogation rights against the trust if payments fell to be made under her guarantee meant that the guarantee did not reduce the value of her estate at the time of her death.
However, the FTT found that the wrongly issued clearance certificate meant that HMRC had debarred itself from pursuing the grounds set out in each determination which related to the transfer of value on the deceased’s death. The appeal was duly allowed.
I tend to agree with HMRC’s analysis but their error in issuing clearance compromised that analysis in practice.
Have a look at this for the details:
https://www.bailii.org/uk/cases/UKUT/TCC/2024/651.pdf
Steve Parnham
