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Tax Liability

Does this solicitor know something I don't?

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y client generously loaned his in-laws £42,000 to settle their Inheritance Tax bill.  The in-laws then sold the property they had inherited and wish to pay my client back out of the proceeds. However, the solicitor says that if the in-laws pay himback themselves, he will have to pay tax on it.  They are stongly suggesting that my client should receive the repayment from the solicitor and in doing so would avoid being taxed on it.  Am I missing something here?  My client did not charge his in-laws any interest or any other kind of consideration for the loan.

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By Paul Crowley
04th Jul 2021 18:02

Rubbish
Does solicitor know what tax he claims is due?
And putting him in the middle saves tax?
WOW tax avoidance just got so easy.

Get someone to check the IHT calculations.

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Replying to Paul Crowley:
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By The Accountant
04th Jul 2021 18:20

Thank you. I was beginning to think I had fallen asleep and missed some new important new tax regulations. I don't know the client's in-laws well enough to check their IHT . Might suggest it to my client though.

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Replying to The Accountant:
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By Leywood
04th Jul 2021 20:16

Is the solicitor trying to pull some scam?

They aren't beyond breaking the rules

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Replying to Leywood:
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By paulwakefield1
05th Jul 2021 08:04

Have to say that was my initial reaction as well.

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By lionofludesch
04th Jul 2021 23:18

Never heard such blocks.

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By lionofludesch
04th Jul 2021 23:18

.

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By Tax Dragon
05th Jul 2021 09:17

As I've pointed out a number of times in here, it is possible for the repayment of a loan to be matched with income and thus give rise to a tax charge.

But there's nothing in what you've told us to suggest this would be the case in your client's scenario.

One or two questions do arise though - such as why was the loan needed, couldn't the tax simply have been paid from the proceeds?

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Replying to Tax Dragon:
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By The Accountant
05th Jul 2021 11:15

My client's income and his tax affairs are all straight forward and I have acted for him for over 30 years. I have no idea why his in-laws could not have done as you suggest, but all I know are the facts as I have related here.

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Replying to The Accountant:
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By Tax Dragon
05th Jul 2021 11:38

I honestly don't think the straightforwardness or otherwise of your client's tax affairs is conceivably relevant. My reaction to the solicitor's suggestion was also of the what's-he-on-about variety. But also I was trying to think of circumstances in which tax might be due. (That said, if such circumstances do exist, I can't imagine using the solicitor as a conduit of the funds makes any difference - foursquare with Paul C's comment on that notion.)

Was the loan short term? If so, rubbish and blocks it is.

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Replying to Tax Dragon:
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By Tax Dragon
05th Jul 2021 11:43

Oh, but reading the other comments, it sounds like it might be the in-laws stalling and making up some tosh to be able to blame the solicitor.

Family politics, not tax. I'm out.

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Replying to Tax Dragon:
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By The Accountant
05th Jul 2021 12:20

Yes, short term.

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Replying to Tax Dragon:
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By Wanderer
05th Jul 2021 11:41

Tax Dragon wrote:

One or two questions do arise though - such as why was the loan needed, couldn't the tax simply have been paid from the proceeds?

No expert however possibly because they needed to pay the tax to get probate. And they couldn't pay the tax until they had sold the property. But they couldn't sell the property until they got probate. And they needed to pay the tax to get probate etc. etc.
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Replying to Wanderer:
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By Tax Dragon
05th Jul 2021 11:45

Yeah I thought of that - but how does payment of IHT by instalments on real estate work?

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Replying to Tax Dragon:
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By Wanderer
05th Jul 2021 11:57

We don't know if the total IHT on the property was £42,000 or £420,000. First instalment due end of month, 6 months after death. Seems solicitors often take longer than 6 months to get probate granted. Dunno if when probate is applied for after 1st instalment due date whether they insist on it being paid before granting probate.

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Replying to Wanderer:
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By WhichTyler
06th Jul 2021 11:34

for info: Accurate, complete, unproblematic probate applications are currently taking at least 8 weeks from when they are received by the probate registry

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Replying to Tax Dragon:
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By Hugo Fair
05th Jul 2021 12:04

From memory (sorry but it's not interesting enough to look it all up) ... you only have to pay 10% of the IHT due to value of property in order to move to probate. The rest can be paid in instalments (over a period of 10 years?)

This is intended to break the obvious catch-22 that would otherwise arise ... and is further 'made simpler' by allowing encashment of bank accounts and/or sales of shares if necessary to pay that 10% (or of course the full IHT due on non-property assets).

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Replying to Hugo Fair:
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By Tax Dragon
05th Jul 2021 12:08

Makes sense, thanks (same @Wanderer).

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By frankfx
05th Jul 2021 09:49

Professional curiosity aroused.

Could your in laws elicit an answer from the solicitor?

Perhaps the legal bods may reveal the
" something" you do not know.

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Replying to frankfx:
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By The Accountant
05th Jul 2021 11:09

I did ask my client this, but he does not have a good relationship with his in-laws. They do get along, but they are the type of people that don't think he is good enough for their daughter and question or dismiss any of his opinions. So would 100% trust the solicitor, but would rubbish anything my client would ask or query.

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Replying to The Accountant:
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By paul.benny
05th Jul 2021 11:26

Yet happy enough to take a loan from him.

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By bernard michael
05th Jul 2021 10:03

Seemples!!!

As a further transaction during the course of selling the property and settling the proceeds it would necessitate an additional charge on the invoice

Devious or what??

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Replying to bernard michael:
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By Paul Crowley
05th Jul 2021 10:33

That was what I thought.
But how big could that charge be? Never worth the extra time involved in inventing a new tax, contacting the client and being shown as dubious.

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Replying to Paul Crowley:
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By Tax Dragon
05th Jul 2021 11:29

Do you remember McGuckian's defence? This was (or included the argument) that the Ramsay principle could not be invoked, because the transaction was part of a larger, and different, tax scheme designed in 1976 with a view to avoiding wealth tax. AFAIK, (UK) wealth tax did not exist in 1976 and hasn't existed since [and that's the point of the argument, I think].

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By paul.benny
05th Jul 2021 11:37

This doesn't quite stack up, specifically around the chain of transactions:
- what was the chain of transactions from loan to HMRC? Specifically, did it pass through lawyer's hands?
- was the loan documented in any way? eg Client requirement for loan to be repaid directly from proceeds
- did Solicitor consider any AML obligations on a loan from a non-commercial source?
- surely funds from property sale are in hands of Solicitor and therefore s/he can disburse directly to Client? The OP reads as if In-Laws have received full proceeds and are being asked to repay via Solicitor.

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By I'msorryIhaven'taclue
05th Jul 2021 11:37

If I were your client I'd be wanting my £42k to come back directly from the solicitor's client account, where it is effectively held in escrow; rather than rely on ungrateful, high and mighty in-laws to cough it up.

You don't say, OP, whether there was a charge for the £42k placed on the property; but that might be at the root of it,and who knows whether the solicitor is shaking his/her head ruefully the way we here do when somebody performs a DIY transaction without the aid of a safety net?

I should be guided by the solicitor, always assuming he looks kosher. Maybe he just doesn't want to say to our protagonist that his dreadful in-laws might just take advantage of his generosity by absconding with his £42k wedge. In which circumstance he may well have dressed up the real reason with a more palatable reason. (And, after all, if our protagonist has £40k at a time flying in and out of his bank account it might indeed be safer to have moneys land in the bank directly from a solicitor rather than from what in a few years time might well have become an unverifiable source).

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Replying to paul.benny:
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By The Accountant
05th Jul 2021 12:27

Actually, in one sense it is my client who is being "awkward". The solicitor is wanting to pay my client directly, but will not do so without complying to AML regulations. My client does not want the hassle of providing the solicitor with the detailed information required.

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Replying to The Accountant:
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By lionofludesch
05th Jul 2021 12:35

The Accountant wrote:

Actually, in one sense it is my client who is being "awkward". The solicitor is wanting to pay my client directly, but will not do so without complying to AML regulations. My client does not want the hassle of providing the solicitor with the detailed information required.

This is now a completely different story.

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Replying to lionofludesch:
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By Tax Dragon
05th Jul 2021 12:46

lionofludesch wrote:

This is now a completely different story.

Neither family politics nor tax.

I'm out. Twice.

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Replying to I'msorryIhaven'taclue:
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By lionofludesch
05th Jul 2021 12:34

I'msorryIhaven'taclue wrote:

If I were your client I'd be wanting my £42k to come back directly from the solicitor's client account, where it is effectively held in escrow; rather than rely on ungrateful, high and mighty in-laws to cough it up.

A point I was too polite to make.

Which is very unlike me, actually.

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Replying to lionofludesch:
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By I'msorryIhaven'taclue
05th Jul 2021 12:41

Retirement's turning you into a [***]-cat, Lion ;-)

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Replying to I'msorryIhaven'taclue:
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By I'msorryIhaven'taclue
05th Jul 2021 12:54

Oops, looks like pu55y isn't allowed.

Which'll ruin it for Mrs Slocombe!

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By Hugo Fair
05th Jul 2021 12:22

Not sure how these would affect the core question, but a few extra thoughts:

1. OP: "client generously loaned his in-laws £42,000 to settle their Inheritance Tax bill." But it wasn't 'their' IHT bill, it was the estate's IHT bill. So to whom did client actually loan the money?
2. OP: "wish to pay my client back out of the proceeds." Is the repayment amount the same as the loan amount, or is there any element of interest/fees/etc?
3. What relationship, if any, does client have to the estate (for instance is he also a beneficiary or even a co-executor)?
4. Was client making the loan as an individual, or via a business he controls?

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Replying to Hugo Fair:
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By I'msorryIhaven'taclue
05th Jul 2021 12:25

The answers I suspect will be somewhat unreliable, since evidently the rhyme and reason is being passed from Solicitor to In-laws to Unworthy Son-in-law and finally on to Accountant.

An element of Chinese Whispers, perhaps?

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Replying to Hugo Fair:
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By The Accountant
05th Jul 2021 12:36

He loaned the money to the in-laws
As stated originally, there is no interest or any other consideration for the loan.
He has no relationship to the estate in any way.
It was a personal loan as an individual.
I also have full knowledge of how he had a spare £42,000 idle to be able to loan it.

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Replying to The Accountant:
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By Hugo Fair
05th Jul 2021 13:24

Thanks for the answers, but your post of 12:27 changes everything ...
"Actually, in one sense it is my client who is being "awkward". The solicitor is wanting to pay my client directly, but will not do so without complying to AML regulations. My client does not want the hassle of providing the solicitor with the detailed information required."

I might quibble with the phrase "in one sense", however, as it now appears as if the awkward person is indeed your client and not the solicitor (although I've still no idea what was meant by the reference to being liable for tax - if this was indeed reported accurately).

Your client seems to have two choices to claim his repayment:
* ignore the solicitor's recommendation, and hope the in-laws are honourable and pay up (especially as it sounds as though documentation may be in short supply and client could end up in a 'he says / she says / ..' loop);
* accept the solicitor's offer, after complying with the AML requirements which are not of the solicitor's making.

It's his choice as to how he prefers to balance risk and effort - and not for you to resolve (or IMO to advise)!

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Replying to Hugo Fair:
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By I'msorryIhaven'taclue
05th Jul 2021 13:49

Except perhaps to the extent that OP's original query aired the matter of Solicitor's contention that the £42k might be taxed.

So it seems the Solicitor may indeed know something the OP doesn't. Could be he's privy to in-laws' malevolent intentions; all or part of the £42k loan being in foldin'-stuff; or maybe a mere MLR suspicion on the Solicitor's part. After all, the in-laws' opinion might just be spot-on: that the son-in-law is a no-good and the origins of the £42k may be suspect.

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Replying to I'msorryIhaven'taclue:
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By Hugo Fair
05th Jul 2021 13:55

Indeed ... it feels unlikely that any party is going to come up smelling of roses (not even whichever one of them thinks they are the rose-bush)!

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Replying to I'msorryIhaven'taclue:
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By The Accountant
05th Jul 2021 15:51

The £42,000 loaned is in no way suspect. It came from my clint's bank account and it's sources are clearly traceable. I have acted for him for 30+ years and all his income is verifyable. There was no formal loan agreement.

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Replying to The Accountant:
By Paul D Utherone
05th Jul 2021 16:41

Maybe, as mentioned up the thread, he is just referring to the outside possibility that at some point in the future HMRC run an enquiry and try to tax the receipt as undisclosed earnings on fishing trip through personal bank accounts, that he's suggesting a trail through his client account could stymie?

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Replying to The Accountant:
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By I'msorryIhaven'taclue
05th Jul 2021 16:48

I hear what you say.

I'll have one last guess: the potential tax the Solicitor envisages might well be IHT - armed with the fresh information that your son-in-law client must be in his fifties, and the supposition that his outlaws are a generation older - it's conceivable that the solicitor is being neat and tidy in an effort to avoid a situation whereby the £42k, if it were to pass through the outlaws' bank account, might end up being counted (rightly or wrongly) as part of their estate(s).

Hence the solicitor's assertion that "they" might just end up paying tax on the £42k if it passes through their (that is, the outlaws') bank account. There, that would fit. Colonel Mustard in the bathroom with the bog brush!

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Replying to I'msorryIhaven'taclue:
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By The Accountant
05th Jul 2021 17:33

That's conceivable. I never thought of that (obviously or I wouldn't have raised the question).

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Replying to The Accountant:
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By lionofludesch
05th Jul 2021 17:46

Is it not just some Money Laundering precaution ?

Fella is not the solicitor's client/no idea who he is/wants to make sure he's paying the right person/some arcane rule in the solicitor's money laundering manual.

Just guessing obviously.

Either way, the fella needs to take a pragmatic view or wait longer for his money.

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By The Accountant
05th Jul 2021 17:37

Thank you everybody for your time and effort. Some really good points raised here. I have enjoyed reading your answers and passed most of them on to my client. And yes, I did tell him I was asking for the opinions of my esteemed professional coleagues!

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Replying to The Accountant:
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By I'msorryIhaven'taclue
06th Jul 2021 09:21

Thank him for his valued custom, and tell him our fee note's in the post ;-)

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
06th Jul 2021 09:53

....as soon as we've completed the AML....

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Replying to I'msorryIhaven'taclue:
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By Tax Dragon
06th Jul 2021 09:57

.

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Replying to Tax Dragon:
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By I'msorryIhaven'taclue
06th Jul 2021 11:01

I wish I had your brevity, TD ;-)

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By JD
05th Jul 2021 18:13

Just a thought, is the solicitor tying himself up in knots over stamp duty, given that £40,000 threshold.

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