Property Tax Planning – Advisors Beware!

Jackie Anderson provides ‘food for thought’ for property tax advisers as they look to balance the expectations of their clients with the need to manage their risk profile, particularly in light of a recent high-profile tax case. 

The Court of Appeal’s recent decision in the case of Hossein Mehjoo v Harben Barker [2014] EWCA Civ 358 will come as a great relief to many accountants - not least because of its less formidable length of 20 pages, compared to the High Court’s earlier decision ([2013] EWHC 1500 (QB)) which is 140 pages long! – but more importantly because it overturned the High Court’s finding that the client, Mr Mehjoo, could sue his accountants, Harben Barker, for over £1 million because he didn’t receive expert tax advice.

Mr Mehjoo had sought tax planning advice ahead of realising an £8.5 million capital gain on the sale of his shares in a retail business. He subsequently entered into a ‘Capital Redemption Plan’ tax scheme (which purported to generate capital losses) to mitigate the tax arising on the gain. However, this scheme was challenged by HMRC and failed, and so Mr Mehjoo had to pay the full CGT liability (at 10%) of £850,000 on the sale of his shares. 

But Mr Mehjoo was an Iranian national, who was not domiciled in the UK, which meant that there would have been other tax planning opportunities available to him to mitigate his potential CGT liability. In particular, at that time, there was a ‘Bearer Warrant Scheme’ (the BWS scheme) potentially available to non-domiciles, which was considered less likely to be challenged by HMRC.

The High Court found Harben Barker to be negligent for not bringing the importance of their client’s non-domicile status to his attention, and for not referring him to a specialist domicile tax adviser.

Mr Justice Silber (at para 221) was satisfied that:

“The Defendants had a contractual duty or concurrent tortious duty as reasonably competent generalist accountants in October 2004 to have advised the Claimant that (i) he had, or very probably (or alternatively might have) had, non-dom status; (ii) non-dom status carried with it potentially significant tax advantages; and (iii) he should therefore take tax advice from a firm of accountants or tax advisers who specialised in advising individuals who had (or might have) non-dom status…”

He concluded that whilst an accountant is generally only obliged to provide advice in accordance with the terms of its engagement letter, it is possible for them to assume additional responsibility by their actions. So, in this case, by discussing CGT planning opportunities with Mr Mehjoo ahead of his share sale, Harben Barker had strayed beyond the terms of their engagement letter and had thereby assumed responsibility for advising him in relation to his CGT planning. 

Harben Barker appealed the decision to the Court of Appeal.

The Court of Appeal heard the case in early February 2014 and handed down its decision on 25 March 2014.

The leading judgement was provided by Lord Justice Patten, who critically drew a distinction between different types of ‘tax planning’. He referred to ‘the giving of general tax advice (such as the availability of reliefs)’ as compared to ‘specialist tax planning advice’ which might cover more sophisticated forms of tax planning including, for example, the BWS scheme. Whilst the former might be expected from generalist accountants, the latter could not be expected without a specific request for such advice from the client.

Patten LJ disagreed with Silber J’s conclusion that a duty to give tax planning advice had arisen from the accountant’s earlier provision of advice which he regarded as ‘relatively routine, even if pro-active’. He said (paras 39 and 40):

“An accountant who is retained by a client to deal with his personal financial affairs will inevitably have to point out what might be the hidden tax consequences of any particular proposal. This may well arise in the context of carrying out general accounting services such as preparing tax returns or more general discussions about the client’s business plans. Similarly, in handling the client’s tax affairs the client can expect his accountant to advise on any available tax reliefs under the relevant fiscal charge which may be available to him to reduce his tax liabilities.

But routine tax advice of this kind, though an important part of an accountant’s ordinary duties, is not what this case is about.”

On the question of Mr Mehjoo’s non-domicile status, he found that (para 56): 

“The reasonably competent accountant setting out to advise Mr Mehjoo of the tax consequences of the sale would not, in my view, have been under any obligation to raise for discussion the claimant’s domicile unless it was relevant to the CGT liability on the disposal. The accountant would have known that it gave Mr Mehjoo no tax advantages in relation to the sale of the BFL shares unless the situs of the shares could be changed. As this was something which HB neither knew nor could have been expected to know was achievable, there was no reason to mention the matter still less a liability in negligence for not having done so.”

The judge therefore found that Harben Barker were not in breach of duty and accordingly allowed their appeal.

These are two aspects to this question. 

Firstly, there is the risk management aspect, in terms of what you need to do (or not do) in order to mitigate the risk of being successfully sued by your client in relation to the provision (or non-provision) of property tax planning advice. 

Secondly, there is the client management aspect – in other words, what property tax planning advice can and should a client expect from you as their accountant or tax adviser? 

The Mehjoo case confirms that your duties are defined by your engagement letter, and your client needs to understand what they can and can’t expect of you as a result. 

You will also need to be clear on what advice is ‘relatively routine, even if pro-active’, in the words of Patten LJ, and what is ‘specialist advice’ that your client would specifically need to request from you. 

There are lots of occasions where you might advise your clients on property tax planning opportunities – for example, your client may be looking to incorporate (or disincorporate) their property portfolio – or they may be looking to optimize their future potential claims to CGT and IHT reliefs by bringing trading property held by partners outside of a partnership into the partnership. Would the former represent ‘specialist advice’? Would the latter be regarded as ‘relatively routine’?

And you would then, of course, need to decide whether you can provide that ‘specialist advice’ yourself, or whether you need to seek expert tax advice instead.

Ideally, all accountants will either have, or to have access to, property tax planning expertise. This may mean that ‘generalist accountants’ and tax advisors will need to gain access to a network of property tax specialist contacts, or to some form of expert online tax support services perhaps.

In any event, from a client management perspective you still need to proactively discuss property tax planning opportunities with your client; that is what they will expect. And while proactivity might increase your potential risk management exposure, the problem with not being proactive is that someone else might then start talking to your clients instead!