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Author: Richard Gray

Less Tax For Landlords: Mistake and the Unintended Tax Consequences

Posted on by Richard Gray

Since November 2023, Elysium Law have been taking enquiries from current/former Less Tax for Landlords clients.

We have previously canvassed the idea of bringing an action under CPR Part 8 for equitable mistake. However, given HMRC’s prevarication, this action has not previously been open to LT4L Clients.

HMRC have now announced that the Letter of Trust which transferred the beneficial interest to the corporate partner in the LLP had Stamp Duty Land Tax liability.  

As a result, landlords that have implemented Less Tax For Landlords’ planning (including those who implemented the planning via Chris Bailey directly) are facing significant and unintended tax consequences.

This will potentially give rise to a claim in professional negligence, but the priority must be to mitigate the losses. One option available is an application to the Court to set aside the arrangements on the grounds of mistake.

We have been approached by a large number of LT4L victims to advise, together with Tax Counsel as to the prospects of bringing this claim.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you

In Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 53 (Bhaur) the Court of Appeal provided helpful guidance on when a court will set aside a transaction and  unwind adverse tax consequences. In summary, this was a tax avoidance scheme using the (abusive) EBT arrangements, to avoid IHT which the court refused to unwind. In this case the presentation of the trust to HMRC was dishonest and was tantamount to tax evasion.

Having lost in the High Court, the Appellants first ground of appeal was that the Judge should have allowed the transaction to be unwound in that the Appellants belief that they would incur no tax consequences was not a misprediction, but a mistake.

The first instance Judgment contains an extended analysis of the law on the setting aside of voluntary dispositions for mistake. The leading authority in the area is the decision of the Supreme Court in Pitt v Holt [2013] 2 AC 108.

In Pitt v Holt, at [103], Lord Walker adopted, the approach of Lloyd LJ in the Court of Appeal ([2011] EWCA Civ 197 at [210]-[211]), setting down three principles which would lay the groundwork for the exercise of the equitable jurisdiction to set aside a voluntary disposition, namely;

  1. A mistake, which is;
  2. Of the relevant type; and
  3. Is sufficiently serious so as to render it unjust or unconscionable on the part of the donee to retain the property given to him.

Misprediction or Mistake – the difference

Misprediction

In Pitt v Holt the Court said a misprediction relates to some possible future event, whereas a legally significant mistake normally relates to some past or present matter of fact or law.

In Dextra Bank & Trust v Bank of Jamaica[2001] UKPC 50, [2002] 1 All ER (Comm) 193 at [29], the court said “… to act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …”

Mistake

This is a different consideration. The courts and lawyers generally deal with mistakes as to the consequences of a transaction.

For many years, a distinction was drawn between a mistake as to the effect of a transaction and its consequences. However, the modern approach is that providing the court is satisfied that there is a causative mistake of sufficient gravity; and as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.

The gravity of the causative mistake is relevant to an assessment of injustice or unconscionability. The court said that the injustice (or unconscionability) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an “intense focus” on the facts of the case including the circumstances of the mistake and its consequences for the person who made the disposition.

An evaluation – what are the merits of the case?

The court will look at the surrounding circumstances and the (in) justice done to the person making the disposition. The doctrine of mistake applies to unintended tax consequences. In Pitt, the court rejected any suggestion that mistake could not apply to tax issues. However, the court added the following when referring to previous cases and in particular Futter v Futter where the doctrine of mistake was not raised by the (Plaintiff). Lord Walker in Pitt said;

“Had mistake been raised in Futter v Futter there would have been an issue of some importance as to whether the court should assist in extricating claimants from a tax avoidance scheme which had gone wrong. The scheme adopted by Mr Futter was by no means at the extreme of artificiality (compare for instance, that in Abacus Trust Co (Isle of Man) v NSPCC [2001] STC 1344) but it was hardly an exercise in good citizenship. In some cases of artificial tax avoidance, the court might think it right to refuse relief…”

Why you need advice on the scheme

Lawyers and students alike will recognise the maxim ‘He who seeks Equity must do Equity’, but effectively any refusal now is based on public policy consideration. An example of this can be found in the case Dukeries Healthcare Limited v Bay Trust International Limited [2021] EWHC 2086 (Ch), with Deputy Master Marsh holding that, whilst the doctrine of mistake applied, it was refused nevertheless on the grounds that the whole transaction amounted to an artificial tax avoidance scheme.

Anyone affected needs independent advice, considering the degree of risk and any artificiality of the scheme, given that unintended tax consequences are an issue. This should be advised upon by an independent law firm such as Elysium Law and will involve review of the documentation, any advice provided to the Claimant at the time and what it was that was that the Claimant hoped would be achieved.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you.

Elysium Law have been approached by a large number of LT4L victims to advise, together with Tax Counsel as to the prospects of bringing this claim.

For further advice, or if you wish to join the group, please contact us at Elysium-law

Contractors – Received a Demand from West 28th Street Limited? Here’s Why You Shouldn’t Pay Yet

Posted on by Richard Gray

Elysium Law has been approached by an insolvency practitioner who has received enquiries regarding demands made by West 28th Street for repayment of loans from various Employee Benefits Trusts (EBTs).

Elysium Law has engaged with West 28 Street on behalf of over 650 clients. The alleged debts (the Loans) were assigned from Felicitas, a specially formed company in the Isle of Man, one of whose directors was Adrian Sacco. Mr Sacco has been disqualified from being a director in England and Wales and also in the Isle of Man. We’ve linked the Insolvency Service publication which demonstrates specifically his behaviour which gave rise to the disqualification. Felicitas attempted to serve demand letters and, in some cases, Statutory Demands for Bankruptcy. Elysium Law, acting in Our Clients’ interests, resisted those demands, which were all subsequently withdrawn.

Following a Mediation and our Letter of Response, Felicitas Solutions Limited (the Isle of Man Company) was dissolved after the debts were purportedly assigned to West 28th Street Limited.

Upon being further contacted, Elysium law sent the Letter of Response to West 28th Street for them to consider – Elysium Law has received no substantial response and nor have our clients.

Our Position in relation to the Demands of West 28th Street

There is a claim in breach of trust for equitable and other relief. The Defendant purports to have purchased and/or been assigned the Trust Assets and has sought to enforce a loan as between the beneficiary who is a contractor (“Beneficiary”) and the original Trust Company (“the Loans”), this was a marketed tax avoidance scheme.

The significance of the purported assignment to Felicitas, and the current purported assignment to West 28th Street, is that they were made for an improper purpose against the interests of the Beneficiaries and with a view to enabling fees to be recovered for the transfers in favour of the Trustees and secondly, recoveries under the Loans in favour of the purported assignees. Accordingly, the assignments were detrimental to the best interests of the Beneficiaries.

They were also contrary to the terms of certain oral collateral undertakings provided by or on behalf of the employers, to the effect that the Loans would not have to be repaid and were the means by which the tax avoidance scheme could operate.

On behalf of its clients, who are Beneficiaries under the various Trusts, Elysium Law contend that any assignments or transfers were for an improper purpose and are void in equity. Any beneficial interest has remained as the property of the Beneficiaries and has not been transferred or assigned. Any purported transfer or assignment is void or otherwise liable to be set aside.

The repeated assignments were in breach of an implied term of the trust relating to the proper exercise of its powers and were unlawful because they were carried out for an improper purpose (also known as a fraud on the power).

The Constructive Trust

The position as set out in FS Capital is that no interest, or right to the Trust Assets have been transferred by the various assignments because they are void. To the extent required, the Beneficiaries will contend that any trust assets alleged to have been assigned by the various assignments are held by the Defendants by means of a Constructive Trust for the benefit of the Beneficiaries. The imposition of the constructive trust arises by operation of law and imposes upon any purported assignee or transferee, the fiduciary principles of a Trustee with regard to the preservation of Trust Assets and the protection of the interests of the Beneficiaries.

The Position

In short, we think the position is as follows:

  1. The assignments were void;
  2. The loans are not enforceable;
  3. Those beneficiaries who have already come to an arrangement must be paid their money back; and
  4. West 28th Street hold all of the assets on trust for Our Clients and all Beneficiaries under the Trust.

Elysium Law are currently acting for a group of 650 Clients who are contesting this claim.

If you wish to join the claim, or are an insolvency practitioner who have been approached by West 28th Street or a firm called Fiscus Management in relation to Your Clients, then please Contact Us.

Mistake and the Unintended Tax Consequences

Posted on by Richard Gray

Elysium Law have received enquiries from taxpayers who have received large CGT assessments from HMRC which have been raised as a result of the Trust document used by Property 118 and Cotswold Barristers.

HMRC’s position is that incorporation relief provided by Section 162 of the Taxation of Chargeable Gains Act 1992 is not available as a result of a clause used in the purported Deed of Trust which creates a power of revocation, allowing the Trustees to vest the property in themselves absolutely and bring the trust to an end. HMRC’s position is that this future right to receive the property creates a separate contingent beneficial interest, which is not transferred to the company. As a consequence, the whole of the assets of the business are not transferred to the company and the relief is not available.

As a result, landlords that have implemented Property 118 or and Cotswold Barrister are facing significant and unintended tax consequences.

This will potentially give rise to a claim in professional negligence, but the losses must be mitigated. One option available is an application to the Court to set aside the arrangements on the grounds of mistake.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you

In Bhaur and others v Equity First Trustees (Nevis) Ltd and others [2023] EWCA Civ 53 (Bhaur) the Court of Appeal provided helpful guidance on when a court will set aside a transaction and  unwind adverse tax consequences. In summary, this was a tax avoidance scheme using the (abusive) EBT arrangements, to avoid IHT which the court refused to unwind. In this case the presentation of the trust to HMRC was dishonest and was tantamount to tax evasion.

Having lost in the High Court, the Appellants first ground of appeal was that the Judge should have allowed the transaction to be unwound in that the Appellants belief that they would incur no tax consequences was not a misprediction, but a mistake.

The first instance Judgment contains an extended analysis of the law on the setting aside of voluntary dispositions for mistake. The leading authority in the area is the decision of the Supreme Court in Pitt v Holt [2013] 2 AC 108.

In Pitt v Holt, at [103], Lord Walker adopted, the approach of Lloyd LJ in the Court of Appeal ([2011] EWCA Civ 197 at [210]-[211]), setting down three principles which would lay the groundwork for the exercise of the equitable jurisdiction to set aside a voluntary disposition , namely;

  1. A mistake, which is;
  2. Of the relevant type; and
  3. Is sufficiently serious so as to render it unjust or unconscionable on the part of the donee to retain the property given to him.

Misprediction or Mistake – the difference

Misprediction

In Pitt v Holt the Court said a misprediction relates to some possible future event, whereas a legally significant mistake normally relates to some past or present matter of fact or law.

In Dextra Bank & Trust v Bank of Jamaica [2001] UKPC 50, [2002] 1 All ER (Comm) 193 at [29], the court said “… to act on the basis of a prediction is to accept the risk of disappointment. If you then complain of having been mistaken you are merely asking to be relieved of a risk knowingly run …”

Mistake

This is a different consideration. The courts and lawyers generally deal with mistakes as to the consequences of a transaction.

For many years, a distinction was drawn between a mistake as to the effect of a transaction and its consequences. However, the modern approach is that providing the court is satisfied that there is a causative mistake of sufficient gravity; and as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.

The gravity of the causative mistake is relevant to an assessment of injustice or unconscionability. The court said that the injustice (or unconscionability) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an “intense focus” on the facts of the case including the circumstances of the mistake and its consequences for the person who made the disposition.

An evaluation – what are the merits of the case?

The court will look at the surrounding circumstances and the (in) justice done to the person making the disposition. The doctrine of mistake applies to unintended tax consequences. In Pitt, the court rejected any suggestion that mistake could not apply to tax issues. However, the court added the following when referring to previous cases and in particular Futter v Futter where the doctrine of mistake was not raised by the (Plaintiff). Lord Walker in Pitt said;

“Had mistake been raised in Futter v Futter there would have been an issue of some importance as to whether the court should assist in extricating claimants from a tax avoidance scheme which had gone wrong. The scheme adopted by Mr Futter was by no means at the extreme of artificiality (compare for instance, that in Abacus Trust Co (Isle of Man) v NSPCC [2001] STC 1344) but it was hardly an exercise in good citizenship. In some cases of artificial tax avoidance, the court might think it right to refuse relief…”

Why you need advice on the scheme

Lawyers and students alike will recognise the maxim ‘He who seeks Equity must do Equity’, but effectively any refusal now is based on public policy consideration. An example of this can be found in the case Dukeries Healthcare Limited v Bay Trust International Limited [2021] EWHC 2086 (Ch), with Deputy Master Marsh holding that, whilst the doctrine of mistake applied, it was refused nevertheless on the grounds that the whole transaction amounted to an artificial tax avoidance scheme.

Anyone affected needs independent advice, considering the degree of risk and any artificiality of the scheme, given that unintended tax consequences are an issue. This should be advised upon by an independent law firm such as Elysium Law and will involve review of the documentation, any advice provided to the Claimant at the time and what it was that was that the Claimant hoped would be achieved.

Should you be the victim of unintended tax consequences, the equitable doctrine of mistake may be open to you.

Elysium Law has been approached to consider bringing such a claim.

For further advice please contact us at Elysium-law

Less Tax For Landlords – The Flawed Business Property Relief Claim

Posted on by Richard Gray

We are writing this article as a result of the extensive enquiries we have received from Landlords who engaged in planning offered by Less Tax for Landlords and the Bailey Group.

HMRC’s view (and that of every other tax expert) is that the planning does not work. HMRC’s views are set out in Spotlight 63. They can be seen here.

In this article, we will look at Business Relief, explaining what it is, when it applies, what LT4L and the Bailey Group have told their clients and why their view is incorrect.

What is Business Relief

Business Relief (formerly known as Business Property Relief) reduces the value of business property for inheritance tax. It is available on the transfers of business assets during lifetime or upon death. To qualify, the business asset must usually have been owned throughout the two years before death or transfer.

There is no Business Relief if the business or company is one of ‘wholly or mainly’ in dealing in securities, stocks or shares, land or buildings or in the making or holding of investments.

A business that only generates investment income will not attract BPR, so this excludes:

  • A residential or commercial property letting business.
  • A property dealing business.
  • A serviced office business.

This means relief is not available to landlords with rental property.

The legislation is contained in Section 105(3) and (4), IHTA 1984.

In deciding whether a business consisted “wholly or mainly” of one or more of these prohibited activities, the courts will look at the business in the round, taking into account all of its activities both at the date of the transfer and over a reasonable period of time before the transfer (which may be several years), to see if one or more prohibited activities predominate – see the case of  George v IRC [2003] EWCA Civ 1763. This means that the test will be applied to the specific facts in each case. Most of the case law considering the ‘wholly or mainly’ test has looked at whether a business is mainly involved in investment activity rather than trading or service provision. 

It therefore seems incontrovertible that BPR or Business Relief is NOT available to Landlords. It defies belief that Chris Bailey, LT4L and the Bailey Group told clients that Business (Property) Relief was available and that the deceased’s estate would not be met with a significant Inheritance Tax liability upon the death of the deceased.

The (Flawed) Basis of the Advice given to the participants in this planning

We must repeat that there is not one tax professional who agrees with the assertion of the availability of Business Relief.

The following is an example of a discussion between Chris Bailey and a tax professional who questioned this aspect of the planning.

Trusted Advisor: You indicated that by structuring the property business in the particular way that you do, you create a trade which would benefit from BR, giving IHT exemption after 2 years. Business relief is not available for businesses which wholly or mainly involve the making or holding of investments. HMRC considered the holding of rental properties an investment business, which I appreciate is a business and can qualify for s.162 TCGA, but regardless of whether it qualifies for incorporation relief is specifically excluded from Business Relief under s.105(3). As such, unless the business of the LLP relates more than 50% to something other than the holding and letting of residential property, then I don’t see how it can qualify for BR, particularly when 100% of the income, management time and expenditure relates to the letting of rental properties.

Chris Bailey: The LLP holds the equity and not the properties – so it cannot be classed as an investment. The owner of the properties will not qualify for BR on the properties, but on the equity.

Trusted Advisor: I don’t understand how holding equity in a property ‘cannot be classed as an investment’. The case of M ROSS v HMRC (2017) confirmed that the exploitation of land in return for rent is still an investment business (this was an FLH (Furnished Holiday Let) case so related to a business that tax law recognises as a trade) and denied business relief. What is the business doing which is not the exploitation of land which would elevate the activity beyond that of a furnished holiday let? Caselaw in recent decades has been very clear that a business must offer significantly more than just the exploitation of a proprietary interest – what additional services do you suggest are being provided by the business, which means it’s not an investment?

Chris Bailey: Once again, unfortunately, we have had clients die during the time that they have been clients and HMRC have accepted all of our Probate calculations based on the above. The cases range from small cases (about £1m assets) to larger cases in excess of £5m assets.

Elysium Law have been approached by clients who, having submitted the claim for Business Relief as advised by Chris Bailey et al via Accountancy and Legal Solutions UK ( which is now OCG Legal and part of the Less Tax for Landlords group of companies), have now received a review of the claim.

So, does it work? – No

Here is an extract from HMRCs letter to the client (redacted to protect any identity:

“The executors returned business assets valued at REDACTED on the IHT400 reporting the IHT Account for REDACTED’s estate. The IHT400 return shows that business property relief was claimed against the full value of these assets.

I am aware that Accountancy and Legal Solutions UK have provided advice to other taxpayers with similar investment businesses in respect of Business Property Relief claims and that those claims have been determined invalid (Our emphasis). Therefore, I am conducting a review to confirm the validity of the Business Property Relief claim in respect of REDACTED’s estate.

REDACTED’s IHT400 return states that the business assets comprised a property management and development business. I have conducted a review of the deceased’s individual tax returns and the tax returns of both REDACTED Ltd and REDACTED LLP but have not been able to identify any evidence of business activity beyond the holding of property as investments.”

HMRC are now claiming the IHT on the full amount, which runs into millions of pounds, in addition to interest on the unpaid IHT, which is racking up at a significant daily rate.

Conclusion

  • The planning does not work and if you have engaged in it, you will suffer losses;
  • Elysium Law has now been approached by numerous clients who have submitted claims for BPR during probate that have been rejected;
  • The deceased’s estate not only faces a significant increase in the IHT payable but also considerable interest, which is increasing daily as well as penalties;
  • We have not seen any advice from Chris Bailey or LT4L to contradict HMRC and Elysium Law believe that the Executors who have submitted claims for relief as a result, have a claim in professional negligence.

Elysium Law has an outstanding track record of bringing, defending, and settling high-value and complex cases.

Contact us today for more information if you have been affected, completing our enquiry page or call us at 0151-328-1968

OCG Accountants: Their Advice To Do Nothing, Requests For Disclaimers and the Unanswered Questions

Posted on by Richard Gray

Elysium Law has received a number of requests for legal advice as to what to do in the face of the latest letter sent by Chris Bailey (of Less Tax for Landlords and the Bailey Group) on behalf of OCG Accountants.

The letter sent to their clients – which we are still considering in more detail – raises two points of concern.

Reliance

Given our experience in professional negligence claims, my colleague Ruby Keeler-Williams previously advised that advice from between Leading Counsel was NOT one that could be relied upon by the clients of Chris Bailey, LT4L or any other who sought advice. WE WERE CORRECT.

At the time of writing the article we had not seen any disclaimer. In their letter to their clients, OCG accountants set out extensively the excellent background and qualifications of Leading Counsel. However, we can now confirm that this caveat was provided further in the letter:

“We are writing this letter to you after taking (Leading Counsels) advice. However, (Leading Counsel) has asked us to make it clear to you that he is advising only OCG Accountants Ltd and not any of its Clients and that he cannot, for a number of reasons, himself accept any duty of care to any of you or to any other third party”.

Our previous warning has been proven correct. There is no duty of care between the Clients and Leading Counsel and they cannot rely upon his advice.

Who is advising Clients?

The letter then goes on to say:

“The advice to you in this letter thus comes from OCG Accountants Ltd. If you choose not to follow that advice, then we will need to discuss this with you and potentially ask you to sign a disclaimer that you are choosing not to follow our advice. This has been requested by the insurance broker who deals with our Professional Indemnity Insurance.”

This raises the question – what ‘advice’ are OCG giving their clients and are they insured to give such advice?

Our belief is that nothing contained within the letter amounts to advice, save for one small sentence, which advises Clients to do nothing.

We now ask Chris Bailey, Less Tax for Landlords, OCG Accountants or anyone else connected: What ‘advice’ have you been giving your Clients?

Given neither Chris Bailey or OCG accountants are qualified, regulated legal professionals, any advice given is not subject to legal professional privilege and as such can be disclosed.

The letter sets out Leading Counsel’s view, and Leading Counsel’s view as regurgitated in this letter is NOT advice to their Clients, as the retainer makes clear and CANNOT be relied upon by the Clients at all.

Therefore, every reference to what Leading Counsel has advised is of no consequence to the Clients. Further, OCG are not underwriting the advice via their retainer – the whole thing is arguably a smoke and mirror exercise.

The difference between Advice and Information

In claims of professional negligence, English law distinguishes between advice and information given to a client upon which the client may act if they chose. This is a complex area of law and is beyond the scope of this post.

Here, with one caveat as discussed later in this article, there is no advice given.

OCG are simply rehearsing Counsel’s view to their clients

Whilst Leading Counsel’s qualifications and experience are very impressive, rhetorically why is OCG setting this out to clients who cannot rely upon it.

You can read our previous post for more information on reliance upon Counsel’s advice.

The Caveat – OCG’s advice is to do nothing

Lest it be thought that OCG have not offered any advice to their clients. OCG have offered one piece of advice and that is to do nothing.

That one small piece of advice in the letter that may have significant consequences. It is predicated upon the basis that the client has received a nudge letter re Spotlight 63 (some clients of course having not):

“…we advise you on what should be your general response to such a letter…  do nothing in response to HMRCs letter.”  (our emphasis)

That advice does not tell you either:

  • What to do if you have not received a letter;  

and more importantly:

  • What the potential consequences are should you not respond either to the letter or to HMRC’s Spotlight 63 registration.

No doubt experienced tax advisers, with whom Elysium Law are currently working, will have far more questions and we are happy to receive them and expand the post.

The Request for a disclaimer – the iniquity of the uniformed choice

In our view, what seems to be iniquitous here is that Clients who are facing unknown consequences have so far received no advice from Chris Bailey, Less Tax for Landlords or OCG Accountants as to the way forward. The Clients are now given a stark choice with uninformed consequences – to sign or not to sign the disclaimer.

Elysium Law assumes (albeit OCG do not specify this) that this is an attempt to bar clients from bringing a claim under OCG Accountant’s Professional Indemnity Insurance should the clients chose not to follow the only piece of advice in the letter; namely to do nothing with regards to Spotlight 63, and should they go to independent and more experienced tax advisers who will give proper, informed, regulated advice.

We ask OCG and LT4L – why only now has this iniquity raised its head and upon what basis is the disclaimer sought?

LT4L and OCG Accountants have been aware of HMRC’s Spotlight 63 since at least 4th October 2023.

They ought to have informed their professional indemnity insurers at that stage of the potential of a claim or claims to be made.

Can they confirm to their clients that they have done so? If it is not the case, then why?

We therefore ask Chris Bailey and OCG Accountant the following questions:

(we invite every client of theirs to copy them and send them to Chris Bailey and the other Directors and demand answers)

  • Does the Schedule of Work in the Client Care Letter, which we assume is different to that sent by LT4L, cover work by OCG as regards any investigations/enquiries by HMRC?
  • Given that HMRC are aware of the LLPs registered at the office of OCG Accountants, what is the harm (or adverse consequences) to clients in simply registering under the Spotlight?
  • Do you accept that registration is not an automatic admission of any tax that HMRC claim to be owed?
  • In the event that a Client does not register, will this expose them to issues such as, but not limited to, greater penalties or possibly the unavailability of any settlement facility?
  • If more penalties and interest may (or do) occur as a result of OCG’s advice, will OCG’s insurance cover ALL penalties and interest that accrue to each and every affected client as a result?
  • Was it a term of any original contract and did you point out that any insurance might be invalid, as we believe you intimate, if the clients did not stay with you in the event of HMRC issues? If not, why not?
  • If this is an attempt at variation of the contract or at exclusion for liability in some form of new contract, have you considered the legislation that protects consumers against unfair exclusion clauses and contractual terms?  If not, why not?
  • Rather the discussing matters with individuals, which may go unrecorded in the event of a dispute, will you set out in clear and unequivocal terms so that your clients can take independent legal advice as to the basis of the disclaimer, its validity and consequences if signed?
  • Will you tell your clients that they should take independent advice before signing the disclaimer? If not, why not?
  • Acting in the interest of your clients and not your own interests or the interests of a third party such as the insurance broker or the underwriter, have you considered whether there could be a conflict of interest in asking the Clients to sign this Disclaimer? Clearly it would suit OCG and their insurers if the clients had signed such a disclaimer, but is that in the best interests of the clients? As set out at paragraph 12 of the ICAEW’s Guidance on identifying and managing conflicts, in relation to self-interest conflicts, the test is whether: “…the member (OCG) can give, and be seen by a reasonable and informed third party to give, objective advice or service.’
  • If you assert that you have considered this and are compliant with it, will you let your clients see your written correspondence with the Broker as to why the disclaimer is sought now and prima facie at least, is not in the interests of the plethora of clients you currently represent?
  • Does the Broker have any interest in protecting themselves in making the request?
  • Has the Broker told you why this request is being made, or upon whose authority, and pointed out to you under the original PII policy that your clients will be covered only in the event that you continue to act even in the face of a significant and serious conflict of interest?
  • Finally, please tell us all now the consequences of not signing the disclaimer as regards your Professional Indemnity Insurance and what you will say to those who want to seek advice elsewhere.

Once again, Elysium Law invite each and every client of OCG/LT4L to reproduce these questions and send them to OCG demanding an immediate response.

Conclusion

The January 31st deadline for registration is upon the users of the planning and we have numerous affected who, rather like a rabbit in the headlines, are caught without knowing the proper way forward.

OCG’s advice, namely to do nothing, cannot seriously be considered as responsible advice such as would be expected from a competent, independent advisor unless they have considered and set out the consequences of following their advice.

We urge their clients to write to them, setting out and adopting our questions. In the meantime, seek independent advice on registration and its potential consequences.

Elysium Law has an outstanding track record of bringing, defending, and settling high-value and complex cases. With a significant number of taxpayers likely to be affected following Spotlight 63, we are looking to advance a group claim. Contact us today for more information and a free consultation.

Exiting Tax Avoidance Schemes following HMRC’s Spotlight 63

Posted on by Richard Gray

In this article, Richard Gray and Ruby Keeler-Williams of Elysium Law provide practical guidance for individuals navigating the exit process from tax planning schemes, notably those promoted by Less Tax For Landlords.

Let us start by thanking the CIOT for publishing the letter which is being sent by HMRC following Spotlight 63. This communication sheds light on the potential fallout from the tax planning schemes orchestrated by Less Tax For Landlords (LT4L) and other promoters.

To see this, you can access the article containing the posted letter on the CIOT website: HMRC One to Many letters concerning ‘Spotlight 63’ LLP property tax planning

Elysium Law have been approached by numerous victims of this particular mess and are looking at bringing claims in professional negligence, amongst other causes of action, against the perpetrators. Note, there are in fact a few providers presently in our sights.

One issue that we raised with the professional advisors with whom we work is the policy HMRC are adopting in relation to the recovery of the many specific tax liabilities this scheme will cause.

Following these discussions, we’ve put together this short practical guide for those affected.

Exit

Exiting a tax planning scheme such as those implemented by LT4L demands careful consideration and strategic planning, especially in the aftermath of HMRC’s Spotlight 63.

Reassessing the Declaration of Trust

The first crucial step in the exit strategy involves evaluating the effectiveness of the declaration of trust over the beneficial ownership of properties within the LLP. If deemed necessary, a change may be required to shift the beneficial interest back to the individual(s). However, it is essential to note that there are significant considerations in this regard, which we will address shortly.

Income Declaration and Section 24 Implications

Once the beneficial ownership is realigned, landlords must declare the income and expenses on the properties as they did before. This reinstatement to individual ownership brings Section 24 of the Finance Act 2015 into focus, particularly impacting the calculation of taxable profits for those with mortgages.

Liquidation of the LLP and Limited Company

In certain scenarios, the LLP and Limited Company member may need to be liquidated, but exercising caution is paramount. This step should only be taken post-settlement to avoid potential complications.

Potential Pitfalls of the ‘Transfer Back’

One of the critical issues in the ‘transfer back’ process involves the change in the corporate member’s entitlement to profits. The looming question is whether HMRC would perceive this transfer as triggering SDLT or CGT charges. While we remain hopeful that it wouldn’t, seeking professional advice before taking any action is essential. Waiting for HMRC’s confirmation or agreement on any arguments presented is equally crucial.

Filing Returns: Exercise Caution and Transparency

For those compelled to file returns before HMRC confirms their stance, it is advised to base your position on professional advice. Full transparency in filing, accompanied by a clear rationale for the chosen position, is vital. Acknowledge the possibility of amendments and be prepared to provide evidence if HMRC disagrees, as filing without proper advice poses the risk of penalties and additional taxes.

Settlement

Mixed Membership and Reallocation

In addressing the mixed membership issue, it is anticipated that HMRC may seek to reallocate profits back to individual members. Moreover, there’s a possibility that HMRC might go a step further and consider ignoring the LLP structure entirely, leading to the computation of tax on the individual(s) based on a ‘normal’ basis.

Corporate Income Tax Offset in Settlement

For corporates that have previously paid income tax on profits, there is a potential avenue to offset or include this in an overpayment claim. This can effectively reduce the ‘cash’ cost of settlement, subject to time limits. Similarly, income tax paid by individuals on dividends from the corporate may be repayable, further alleviating the financial impact of settlement.

Inheritance Tax Implications

While we hope that no participants in these arrangements have passed away, considerations must be made. If Business Property Relief has been claimed for Inheritance Tax (IHT), and it is deemed ineffective, HMRC would expect necessary amendments.

CGT and SDLT Liabilities

The transaction and reallocation of profits may have triggered liabilities in terms of Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). HMRC’s perception of the effectiveness of these events will determine the course of settlement. There’s a possibility (albeit a significant one) that HMRC may choose to ignore these issues. If not, computation and payment of SDLT and CGT become necessary, requiring careful consideration of available reliefs.

HMRC Registration and Policy Pause

While HMRC advises victims of this scheme to register, responsible professionals should encourage compliance. However, we recommend pausing a moment. As of now, HMRC has not disclosed its policy on these matters, making it crucial to stay informed and navigate the registration process with a clear understanding of potential implications.

Next Steps

In the initial phase, Elysium Law strongly advises seeking assistance from a professional adviser. Rushing into decisions without expert guidance may inadvertently lead to the creation of further tax liabilities. A professional adviser can provide invaluable insights, helping you make informed choices tailored to your unique circumstances.

It is highly likely that discussions with HMRC will be necessary to navigate the complexities of settlement and exit. Achieving a clear understanding of the precise terms for both settlement and exit is crucial. This ensures that you can leverage the benefit of any tax already paid, contributing to a smoother resolution of the situation.

Should you find yourself impacted by the aftermath of LT4L and the tax planning issues discussed in this article, Elysium Law is here to offer guidance and assistance. We recognise the complexity of the situation and the potential legal challenges involved, and our team stands ready to advise. Contact us today for advice on your personal circumstances.

Deed of Assignment and the Notice of Assignment -What is the Difference?

Posted on by Richard Gray

In this article, Richard Gray barrister takes a brief look at the differences between a Deed of Assignment and a Notice of Assignment and the effect of the assignment on the contracting party

At the end of 2020, Elysium Law were instructed to act for a significant number of clients in relation to claims made by a company known as Felicitas Solutions Ltd (an Isle of Man Company) for recovery of loans which had been assigned out of various trust companies following loan planning entered into by various employees/contractors.

Following our detailed response, as to which please see the article on our website written by my colleague Ruby Keeler-Williams, the threatened litigation by way of debt claims seem to disappear. It is important to note that the original loans had been assigned by various Trustees to Felicitas, by reason of which, Felicitas stood in the shoes of the original creditor, which allowed the threatened action to be pursued.

After a period of inertia, Our Clients, as well as others, have been served with demand letters by a new assignee known as West 28th Street Ltd. Accompanying the demand letters is a Notice of Assignment, by reason of which the Assignee has informed the alleged debtor of the Assignees right to enforce the debt.

Following two conferences we held last week and a number of phone call enquiries which we have received, we have been asked to comment upon the purport and effect of the Notice of Assignment, which the alleged debtors have received. Questions such as what does this mean (relating to the content) but more importantly is the ‘Notice’ valid?

Here I want to look briefly at the differences between the two documents.

 

There is no need for payment to make the assignment valid and therefore it is normally created by Deed.

 The creation of a legal assignment is governed by Section 136 of the Law of Property Act 1925:

136 Legal assignments of things in action.

(1)Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—

(a) the legal right to such debt or thing in action;

(b) all legal and other remedies for the same; and

(c) the power to give a good discharge for the same without the concurrence of the assignor:

Some of the basic requirements for a legal assignment are;

  • The assignment must not be subject to conditions.
  • The rights to be assigned must not relate to only part of a debt, or other legal chose in action.
  • The assignment must be in writing and signed by the assignor.
  • The other party or parties to the agreement must be given notice of the assignment.

 

Notice of assignment

To create a legal assignment, section 136 requires that express notice in writing of the assignment must be given to the other contracting party (the debtor).

 

Notice must be in writing

Section 136 of the LPA 1925 requires “express notice in writing” to be given to the other original contracting party (or parties).

 Must the notice take any particular form?

The short answer is no. Other than the requirement that it is in writing, there is no prescribed form for the notice of assignment or its contents. However, common sense suggests that the notice must clearly identify the agreement concerned.

Can we  challenge the Notice?

No. You can challenge the validity of the assignment assignment by ‘attacking the Deed, which must conform with Section 136. In this specific case, the Notice sent by West 28th Street in itself is valid. Clearly, any claims made must be effected by a compliant Deed and it is that which will require detailed consideration before any right to claim under the alleged debt is considered.

Can I demand sight of the assignment agreement

On receiving a notice of assignment, you may seek to satisfy yourself that the assignment has in fact taken place. The Court of Appeal has confirmed that this is a valid concern, but that does not give an automatic right to require sight of the assignment agreement.

In Van Lynn Developments Limited v Pelias Construction Co [1969]1QB 607  Lord  Denning said:

“After receiving the notice, the debtor will be entitled, of course, to require a sight of the assignment so as to be satisfied that it is valid…”

The Court of Appeal subsequently confirmed this  stating the contracting party is entitled to satisfy itself that a valid absolute assignment has taken place, so that it can be confident the assignee can give it a good discharge of its obligations

Summary

The important document is the Deed of Assignment, which sets out the rights assigned by the Assignor. The Notice of Assignment is simply a communication that there has been an assignment. The deed is governed by Section 136 of the LP 1925. It should be possible to obtain a copy of the Deed prior to any action taken in respect of it.

For more information on the claims by West 28th Street or if advice is needed on the drafting of a Deed, then please call us on 0151-328-1968 or visit www.elysium-law.com.

Employee Benefit Trusts – Use, But Don’t Abuse

Posted on by Richard Gray

In this article Richard Gray Barrister gives an overview on the use of Employee Benefit Trusts and considers, even though the aggressive EBT schemes are a thing of the past, whether they are still being considered principally as a vehicle to avoid Inheritance Tax (IHT) and the potential pitfalls should that occur.

Having just finished a lengthy conference with a client, I was reminded of something a colleague of mine said, namely that; “Google is not kind to EBTs”.  If you were to Google the point, that appears to be correct and in this case the Client threw many questions at me surrounding the abusive arrangements for which they had previously been used. We now know all too well the effect of those arrangements and the misery they generated.

Aggressive schemes apart, there is very much a place for an EBT within the context of proper business planning and recently, Elysium Law has advised upon their use in the sale of a trading company where, prior to implementation, HMRC gave clearance.

Regrettably, there is still a temptation to use them purely as a vehicle for avoiding IHT and in this article I look at the consequences of the misuse of an EBT and simply ‘getting it wrong’.

Be warned of the use of an EBT in, for example, a small family company who just after incorporation of an investment portfolio now wants to avoid IHT by placing the shares into an EBT. It won’t work!

What is an EBT?

An EBT is a type of discretionary trust set up to fall within the definition of a trust for the benefit of employees within the provisions of Section 86 of the Inheritance Tax Act 1984 (IHTA 1984). This provides exemptions from inheritance tax (IHT) for certain transactions involving qualifying EBTs.

Special Treatment of Section 86 Trusts

The following should be noted in relation to a section 86 trust

It is not a relevant property trust;

A section 86 trust is not a relevant property trust.  Relevant property trusts are subject to the specific inheritance tax regime in Chapter III, Part III of the Inheritance Tax Act 1984. Therefore, a section 86 trust it is not subject to the IHT charges such as the exit charge and the ten-yearly charge.

Transfer of Value to an EBT

If a close company makes a transfer of value to an EBT, this will be a chargeable transfer, apportioned to the participators under section 94, IHTA 1984.

There are, however, four possible reliefs and exemptions that may be available:

  • Dispositions not intended to confer a gratuitous benefit;
  • Dispositions allowable for corporation tax.
  • Disposition for the benefit of employees.
  • Business property relief.

Section 13 of the Act deals with transfers of value into the Trust.

Consideration is then to be given to the effects of Section 239 of the Taxation of Chargeable Gains Act 1992., which gives the exemption of CGT for the ‘transfer in’ of the assets.

Inheritance tax

Section 28, IHTA 1984 provides that a transfer of value by an individual to an EBT will be an exempt transfer where the following condition is satisfied:

  • The EBT is a section 86 trust with restricted beneficiaries.

However, the reliefs granted are subject to anti avoidance provisions without which it would be easy to use the EBT exemptions to transfer wealth from one generation of a family to another without adverse IHT and CGT consequences

Should an EBT be considered abusive by HMRC, then the trust will be treated as a Relevant Property Trust and a short contrast with that regime, as opposed to EBTs, must be considered.

Inheritance Tax considerations

Lifetime gifts into discretionary trusts are chargeable lifetime transfers (CLTs).  IHT will be charged at the lifetime rate of 20% on the amount above the settlor’s nil rate band. There is

10-year periodic charge

Discretionary trusts are ‘relevant property’ trusts because the trust assets are not included in the taxable estate of any of the beneficiaries, the trust itself will be assessed to IHT. That means that on each 10-year anniversary the trust is taxed on the value of the trust less the nil rate band available to the trust. The rate they pay on this excess is 6% (calculated as 30% of the lifetime rate, currently 20%).

Capital Gains Tax – Gifts into trust

Lifetime gifts of existing assets into trust, other than gifts of cash or the assignment of investment bonds, will be disposals for CGT.

During the life of the trust

If the trustees dispose of trust assets the gains are calculated in the same way as for an individual and taxed at the trust rates of CGT. The trust rates are 20% or 28% for residential property.

If the EBT is reclassified by HMRC as a Relevant Property Trust, then penalties and interest will apply and therefore extreme caution must be exercised when advising on the set up of the EBT

DoTAS and the final word

Again, a detailed consideration of these provisions is beyond the scope of this article, but advisors should consider whether placing shares in a small investment company with no employees will fall within the DoTAS legislation. In my view it does and the temptation to do this must be avoided

IHT hallmark a revision from the previous legislation

The IHT arrangement Regulations 2017 were made on 29 November 2017 and came into force on 1 April 2018, replacing the previous IHT hallmark.

Arrangements to which the IHT hallmark applies

The IHT hallmark applies to arrangements if it would be reasonable to expect an informed observer to conclude that both of the conditions below are met.

Condition 1

The main purpose, or one of the main purposes, of the arrangements is to enable a person to obtain one or more of a list of specific advantages in relation to IHT (tax advantage).

The specific advantages are:

  • The avoidance or reduction of a relevant property entry charge, the ten-year anniversary and exit charges.

(Regulation 4(2), IHT Arrangements Regulations 2017.)

Condition 2

The arrangements involve one or more contrived or abnormal steps without which a tax advantage could not be obtained.

(Regulation 4(3), IHT Arrangements Regulations 2017.)

EBTs if used properly have a significant place in Tax and Business planning. If you want further advice upon the use EBTs, EOTs and of an EBT upon the proposed sale of trading company, then contact us via email at clerks@elysium-law.com or call 0151 328 1968

Sole Directors: Amend Your Articles

Posted on by Richard Gray

In this article Richard Gray of Elysium Law considers amendments to the Model Articles adopted by a company with a sole Director.

Elysium Law were approached recently concerning the amendment to the Model Articles adopted by a Company who only had a sole Director.

The Company had secured the offer of a mortgage, but the lender required an amendment to the articles in that the acceptance of the mortgage offer and a charge over the property could be accepted by the Sole Director.

In pursuance of that requirement, we advised upon and amended the articles in the modified form as well as drafting the Special Resolution required.

The decision in Hashmi v Lorimer-Wing [2022] EWHC 191 (Ch) has called into question whether the articles of companies which adopt or automatically incorporate the model articles for private companies must be amended if the company is to be a sole director company. The High Court considered, among other things, the proper interpretation of Model Articles 7 and 11 and held that the provisions in Model Article 11(2) should be construed as imposing a requirement for a company to have a minimum of two directors.

Article 7

“7.—(1) The general rule about decision-making by directors is that any decision of the directors must be either a majority decision at a meeting or a decision taken in accordance with article 8.

(2) If

(a) the company only has one director, and

(b) no provision of the articles requires it to have more than one director,

the general rule does not apply, and the director may take decisions without regard to any of the provisions of the articles relating to directors’ decision-making.

Article 11

11.—(1) At a directors’ meeting, unless a quorum is participating, no proposal is to be voted on, except a proposal to call another meeting.

(2) The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

(3) If the total number of directors for the time being is less than the quorum required, the directors must not take any decision other than a decision

(a) to appoint further directors, or

(b) to call a general meeting so as to enable the shareholders to appoint further directors.”

Article 11, more or less replicates regulation 89, and anticipates that there must be at least two directors to form a quorum. A company as a matter of law however must have only one director.

Where only one director holds office, article 7(2) disapplies any provisions of a company’s articles relating to decision making by directors, provided the articles do not specify that at least two (or more) directors are to hold office at all times. If the articles do specify such a minimum number of directors, a sole director may only take decisions for the purposes of appointing further directors (article 17(1)(b)) or calling a general meeting to allow the shareholders to appoint further directors (article 17(1)(a)).

In Hashmi (above) the Court held that Model Article 7(2) was clear; it permitted a sole director to manage the company, where no provision of the articles required it to have more than one director. In this case, bespoke article 16.1 of the company’s articles replaced Model Article 11(2)) and required there to be multiple directors for board meetings to be quorate which the court considered also to mean that the articles required it to have more than one director. That being the case, Model Article 7(2)(a) was disapplied.

This decision indicates that it would be wise for existing private companies with model articles or articles based upon them may wish to amend them, by for example amending Model Article 11(2) by not requiring the company to have more than one director within the meaning of article 7(2)(a).

It seems that the validity of acts taken by sole directors in companies with articles based on the model articles is now likely to be called into question.

As a consequence, companies which have, or have had, a single director may also wish to consider whether, where appropriate, they should ratify some or all of the previous decisions of those directors. Note that amendments of articles will only take effect from the date of amendment, and not all companies are likely to ratify all past decisions of their sole directors.

Clearly when forming a new company bespoke articles should be filed rather than model articles. The suggestion must be that the provision of Article 11 is changed to accommodate the sole director position. A suggestion has also been made that Article 15; the recording of decisions should also be reviewed to accommodate the position.

Call us on 0151 328 1968 or email clerks@elysium-law.com for an initial discussion with one of our team.