The outer pipe should extend past the inner pipe at the rear by 3/8" to 1/2" to create a venturi effect and pull cooling air between the two pipes.

You mention a "one inch gap". I assume you are referring to the gap between the tailcone of the engine, and the front of the inner pipe.
Between what points are you measuring this gap?
It's hard to tell from the picture, but the tailcone of the the turbine you are using looks similar to a P-80 in that it has an inner cone and an outer cone. You should be measuring between the back edge of the outer tailcone and the front of the tailpipe.
If you made the gap between the back of the inner tailcone and the front of the pipe it would be way too wide and allow for the gasses to expand too much before they even entered the tailpipe, and probably create the problems you are seeing.