LT4L Archives - Elysium Law

Less Tax For Landlords: Mistake and the Unintended Tax Consequences

Posted on 09 Dec 2024 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;

A mistake, which is;
Of the relevant type; and
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

Less Tax For Landlords – The Flawed Business Property Relief Claim

Posted on 09 Feb 202404 Apr 2024 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.

FAQS FOR SPOTLIGHT 63 VICTIMS (LT4L, BAILEY GROUP)

Posted on 29 Nov 202304 Apr 2024 by Ruby Keeler-Williams

Elysium Law have been approached by a number of individuals and professional advisers about what is rapidly becoming a serious issue for those who entered planning with Less Tax For Landlords and Bailey Group.

In response to the mounting questions surrounding this issue, we’ve crafted this Frequently Asked Questions (FAQ) article, accompanied by our suggested answers.

Who are Elysium Law?

We’re a BSB Regulated Entity as a Direct Access Barrister firm with litigation privileges, which means that we can do the same work as a regular law firm but with the prestige and expertise of Barrister working directly on your matter, day to day.

We have successfully represented hundreds of people individually and in large groups in complex and high value group litigation. We are here to help, so please get in touch with us if you’re worried about either of the above matters.

Are there any fees associated with initially getting in touch?

No. At this stage we are inviting potential victims of planning following HMRC’s Spotlight 63 to have an initial consultation with us where we’ll conduct a fact find and discuss the group litigation.

Following this, we’ll register your interest in the group litigation so we can keep you updated regarding our pursuit of the potential claims.

It is important that you appoint a professional tax advisor alongside pursuing any litigation. We are currently working alongside professional advisors.

Will HMRC know I have contacted you?

No. You are entitled to seek advice and we are qualified professional legal advisors and you have legal privilege in all our discussions with you. This means in simple terms that we cannot disclose anything discussed between us without your permission if the communication is kept confidential (apart from if a criminal activity is disclosed).

We’ll advise you further about legal privilege as part of the litigation.

What claims are you looking at?

We’re currently looking at claims in Breach of Contract and Professional Negligence in relation to the planning provided by firms Less Tax For Landlords and the Bailey Group.

Why should I get legal representation sooner rather than later?

There are legal limits as to when a claim can be made, known as limitation.

In Breach of Contract claims, it is 6 years from the date the contract (letter of engagement) was signed.

In Professional Negligence claims, it is 6 years from the date the loss arose. The date of loss will be different depending on the scheme you entered into. Examples here may include the of the tax return was submitted or the date when any tax liability arose.

We must progress through the pre-action protocols before we can issue a claim and ‘stop the clock’ on limitation. It is vital that there is sufficient time to fully assess the matter, fully advise you, issue a letter of claim on your behalf, allow 3 months for the other side to respond, deal with any letter of response and seek any pre-action disclosure necessary.

Additionally, you will need to mitigate (lessen) your loss, which in this case means settling with HMRC and reaching a tax compliant position. HMRC are aware of the planning and have issued Spotlight 63 and ‘One Too Many’ letters to notify taxpayers. You will need to appoint a professional advisor to liaise with HMRC and settle the matter, which will take time.

Is doing nothing an option if you have not received an HMRC nudge letter?

No . Registration with HMRC should be undertaken.

However we suggest that before doing so, you obtain advice from an experienced regulated tax advisory firm, who will assist you in regularising your tax affairs by advising you on the different tax payable, minimising interest and penalties if applicable and will help mitigate your losses in any claim we can assist with. Our advice is to get expert professional tax advice and subject to that advice attempt to settle with HMRC.

Why is it important to mitigate your loss

The rule of mitigation requires a claimant to take steps to minimise its loss and to avoid taking unreasonable steps that increase its loss. Whether arising from a breach of contract or breach of duty, the injured party cannot claim damages for losses that could have been prevented through reasonable measures.

Here, it will be essential to work in tandem with experienced professional advisors who can settle claims with HMRC. This will assist us in calculating your losses and allow us to prove that you acted swiftly and responsibly.

What damages will you be seeking?

The damages will be carefully assessed for each client, but we anticipate claims including:

The Fees paid for implementing the planning
Tax Liabilities (potentially including CGT and SDLT)
Any loss relating to mortgage default due to the planning
Fees of any professional advisors to settle with HMRC and reach a tax complaint position
Accountancy fees regarding the two entities, cessations accounts
Legal Costs

What documents will be important?

We would like to see all documentation, but we’re specifically interested in these documents:

The Engagement Letter: The engagement letter is the contractual obligations of the advisor and we need to look at what they have expressly promised to do.

The Tax Advice: You should have been given solid advice that contain risk warnings. In some cases we are aware of, no advice was given. We will look at the content of the advice to see if it is legally sound and look for the risks warning which you should be made aware of. The absence of the latter will indicate whether there is a potential causation issue depending upon the strength of the warning.

Any Scheme Documentation: We need to see how the scheme has been implemented to see if it is technically correct. This includes any partnership documentation, any deeds of trust, any deeds of transfer, etc

Does it matter whether I have fully implemented the planning?

In a matter such as this, there will likely be different ‘classes’ of Claimant depending on the loss suffered.

This will likely be determined by how much of the planning has been implemented at each stage.

Currently, we envisage the following scenarios:

a. Claimants who have paid fees but not implemented the planning;

b. Claimants who have partially implemented the planning

c. Claimants who have fully implemented the planning

How can I contact you?

You can contact us via telephone or email for a free initial consultation.

Elysium Law has an outstanding track record of bringing, defending and settling high-value and complex cases. With hundreds or even thousands likely affected following Spotlight 63, we are looking to advance a group claim. Contact us today for more information

Exiting Tax Avoidance Schemes following HMRC’s Spotlight 63

Posted on 14 Nov 202304 Apr 2024 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.