Taking a holistic approach between Tax Advisor and Private Client Advisor

Land Taxes » November 11, 2019

tax planning advisor

As a tax adviser and a private client solicitor, we both frequently deal with complex matters without requiring external, specialist expertise. However, there are certain situations where working with specialists benefit both adviser and client, as it allows for swift, cost-efficient and holistic advice to be provided.

Working together has numerous benefits which enable each party to focus on their area of expertise, with the added advantage of sharing and developing ideas when collaborating. The ability to receive an immediate, accurate response to technical tax queries prevents delay and reduces anxiety for clients, particularly where the response has significant financial and emotional implications, combined with the potential of the matter becoming contentious.

In this way, with complex transactions, if handled effectively, you can act in your client’s best interests and share the risk with another specialist.

In this article for The Law Society, we consider a real-life case on which we worked together, which highlights the benefits and best practice points of working collaboratively.

The estate of Mr Jones: case study introduction

Mr Jones died suddenly, having appointed his two children as executors of his discretionary trust will.

Five years before his death, he passed his home to two of his four children in an 80/20 split, amongst other significant lifetime gifts.

Per the letter of wishes, Mr Jones wished for the 80% share of the house to be part of the distributable estate, even though it had been gifted.

The property was split into three flats and Mr Jones continued to live in one flat and paid rent for the duration at the same rate.

Relationships between the executors were good, although there was a deep-rooted family history of resentment about money.

The issues to consider included, but were not limited, to:

  • whether the gift with reservation of benefit rules (GWROB) applied, or whether the property had been validly gifted
  • whether inheritance tax (IHT) was payable on the potentially exempt transfers (PET) for which the executors had no liquid funds without selling a property
  • calculating the most effective way to bring the 80% value of the home back into the estate without triggering further tax liabilities or exacerbating historical conflict between the executors regarding the gift.

Initial instruction

It is crucial at the outset to gain an understanding of your client’s circumstances, while also being aware of any potential conflicts, for example, a history of sibling rivalry resulting from imbalanced lifetime gifts. The following points are essential to consider:

  • What does the client wish to achieve?
  • What is the scope of the solicitor’s retainer?
  • How much involvement does the client expect to have with me? For example, do they travel regularly, making their involvement less practical?

It may become apparent that the client has some complex financial arrangements in place or undertaken previous tax planning strategies which are no longer effective or appropriate.

Let’s return to our case study. On first meeting the executors, it was apparent that they were anxious and not coping with their recent loss. Due to the value of the property, and dependent on further investigations, it was clear that there could be significant tax liabilities on a failed PET and the property falling back into the estate under the GWROB rules, as well as capital gains tax (CGT) implications should the executors wish to sell the property, now in their names.

At this time, a private client solicitor may consider it to be in the best interests of the client to either engage the services of a tax adviser or instruct counsel for an expert opinion or support. Considering cost and whether the complexities are tax technicalities or points of law will determine which one to instruct. The issues at play in the Jones estate lent themselves to a tax adviser.

If you decide to use a tax adviser, it is vital to consider the following points.

  • Do they have the requisite technical knowledge?
  • Will they be available to attend joint meetings with the client, if needed?
  • Are they an appropriate personality choice for the client (particularly if the client is vulnerable and/or inexperienced)?
  • Do they share your firm’s values and ethos? Remember that this is your introduction on behalf of your client.

Also bear in mind that HM Revenue & Customs (HMRC) do not regulate tax advisers, and any individual can register to become a HMRC agent. HMRC does not publish a public list of approved and regulated tax advisers. A recent study by HMRC (Revenue & Customs Research Report 539) revealed that one in three tax agents are unregulated.

The two main qualifications for a tax adviser, in order of seniority, are CTA (chartered tax adviser) and ATT (member of the Association of Tax Technicians). Both accreditations are regulated by the Chartered Institute of Taxation.

Communicating to the client

The history and personalities involved in the Jones estate were complex beyond just the tax position. It was suggested to the clients that the assistance of a tax expert to work solely on the tax side, reviewing forms and working with their solicitor to communicate with HMRC, would both save time and increase the level of expertise. Further, as the clients had the personal and onerous duty to make declarations to HMRC, in complex matters it might be wise to be guided by a tax adviser.

It is important to clarify to your client that you will receive no financial benefit if you refer work to an independent adviser. Indicative behaviour O(1.4) of the SRA Code of Conduct sets out a solicitor’s obligation to explain any arrangement, such as fee-sharing or referral arrangements, which are relevant to the client’s instructions. We should all be aware of the relevant outcomes set out in chapter 9 of the SRA Handbook.

It is often useful to send an example of recent case law to the client to reinforce the need for clarity, integrity and communication, and to highlight the fact that holistic advice benefits everyone concerned. For example, in Hutchings v HMRC [2015] UKFTT 9 (TC), Mr Hutchings received a gift of approximately £450,000 from his father in the form of an offshore bank account transfer. The executors were unaware of the offshore bank accounts, as well as the gift itself. The result was that the IHT paid on the estate was three times lower than the sum that should have been discharged. Since the executors had no previous knowledge and were “seriously misled”, HMRC held the beneficiary personally liable for the additional IHT, as well as imposing a large financial penalty (50% of the potential lost revenue) for failing to promptly disclose information to the executors.

Mr Hutchings appealed the penalty on the basis that the executors not only failed to make clear what information he was required to disclose, but also because he considered it to be the executors’ responsibility to discover the offshore bank account. Although the appeal was dismissed, the First-tier Tribunal (Tax) said that executors must be careful to clearly communicate their requests to beneficiaries and the deceased’s advisers. Equally, beneficiaries must be careful to promptly and honestly reply to requests from executors. A failure to do so will be taken seriously by both HMRC and the courts and can result in individuals being held personally liable for their failings.

Engaging an adviser

Once all are agreed to work together, ensure that the adviser is engaged with clarity and transparency. This should include the solicitor preparing:

  • a confidentiality agreement
  • a supplementary letter setting out specific roles and responsibilities for the duration of the working relationship.

The tax adviser should prepare an engagement letter setting out the scope of the work, including their limits of insurance liability and fees (rates will vary according to who you instruct, however, you could expect to pay between £150 and £350 plus VAT per hour and, if estate accounts are required, from £1,500 plus VAT).

It’s a good idea for you both to review each other’s engagement letters and terms for consistency.

We found that setting aside two days at the solicitors’ office meant we were able to work steadily through the Jones estate, combining our expertise.

Clients should be updated by either the solicitor or the adviser at every step of the matter, depending on whether it is a tax or legal point that is in question. The other person should always be copied into the email to the client for clarity’s sake. Working on the Jones estate, we had one meeting in person with the clients and several conference calls. If one of us needed to speak to the clients directly, we shared the attendance note between us, and forwarded it to the clients for transparency.

Once the matter is completed, ensure that the tax adviser disengages from the client. The client needs to understand that the adviser is no longer acting for them and that any ongoing filings are the client’s responsibility. The tax adviser should issue a disengagement letter, providing details of the work that has been completed, including key dates and information for the future. For example, this may include a summary of the IHT and CGT discharged from the estate. In the case of Mr Jones, as one property was held outside of the estate, the CGT payable fell on the executors, which meant that they had to settle their liabilities directly with HMRC within a timescale.

What could go wrong?

While many private client practitioners may have some technical knowledge of complex tax issues, it is important to recognise your limits and avoid straying into areas where you may not feel as confident in giving advice. Some practitioners will have developed long-term, trustful relationships with tax advisers, although of course not every adviser is an appropriate personality match for the client.

Securing the best outcome for the executors of the estate of Mr Jones

Due to the pattern of events leading up to Mr Jones’ death, it was vital to consider whether his property was validly gifted. By discussing the situation openly with our clients, it was apparent based on the facts that the gift was valid. This involved reviewing bank statements for proof of rent, reading personal emails between Mr Jones and his children, and understanding the intricacies of their relationship. The sensitivity of the issues under discussion meant that there were disagreements, misunderstandings and at times, tears. However, we were able to use this information to support Mr Jones’ intention at the time of making the gift. Documenting evidence clearly, as well as considering further relevant information to provide to HMRC, demonstrated the validity of the gift.

One challenge was explaining that the PET liability was an individual responsibility of the executors, and not the estate. It meant that the property needed to be sold to enable his children to settle their personal PET liabilities. However, as the property was held by the children, this needed to be a personal decision, and not one of the estate. In order to reach this conclusion, the clients requested computations regarding the IHT and CGT position of the estate, complicated further by a client’s foreign residency.

Mr Jones had requested that a number of charities should receive 5% of his estate. He had a history of charitable gifting, and the executors had a clear understanding of the additional charities Mr Jones supported. Discussing this, it made sense to increase this figure to 10%, thereby reducing the IHT position to 36%, with a benefit to all beneficiaries. The clients requested computations to understand the effect this would have.

The deep-rooted family resentment around money was the most difficult aspect of the estate to manage. The majority of the beneficiaries inheritance was to be discharged from 80% of a property which had be validly gifted. We found that having advisers from different disciplines present to discuss this and reroute the conversation back to actions for settling the estate prevented too much time being spent wrangling over historical family issues. Though compromise the clients was needed, concluding estate matters was not just a legal and tax requirement. It enabled the closure of historical financial disputes.

Best practice summary

Below is a checklist of actions to make sure you both get the best out of your working relationship.

  • Work with an adviser who shares your values and who you trust to introduce to your clients.
  • Try to meet in person to understand the personalities involved in the matter you’ll be working on, and any tensions that have arisen, historical or current.
  • Set clear guidelines and independently draw up engagement and client care letters, setting out how the relationship will work in practice – this will save duplication.
  • Set out between you who will lead the client relationship.
  • Build trust in the relationship, both between solicitor and adviser, and with your client. For example, make sure you speak to each other before any meetings with the client, to make sure you’re both ‘on the same page’ and have the same aims.
  • Be open about each other’s expertise and where there are gaps in knowledge. Where one of you has previous experience of matter, share and apply what you know.

Of course, as with anything, things can go wrong. Below are some blockers to an effective working relationship between solicitor and adviser, some common pitfalls and how to avoid.

  • Fear of duplicating work – this can be navigated with a willingness to communicate.
  • Lack of empathy with the client – both of you need to be aware of the impact of this and allow for extra time with the client to build the relationship.
  • Clients can be concerned about being overcharged – this can be resolved by frequent updates on costs incurred, and being clear on any predicted future costs.
  • Lack of creativity, when working through lifetime gifts. When reviewing seven years’ worth of bank statements, for example, it is helpful if both of you can have open, honest conversations with the client about the deceased’s standard of living, habits, and medical history: did they have any addictions, or a medical history of depression? Is a bank transfer a gift, or a reimbursement?
  • One of you trying to secure a ‘personal win’ with the client, rather than accepting that a beneficial outcome for the client reflects on both parties equally well.
  • Being inaccessible – working in different offices can present challenges if urgent work needs to be completed. File-sharing sites and conference calling can help here.

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