If you fail to seek advice on trust tax implications…
Failure to seek advice on trust tax implications – deliberate
Soleimani-Mafi  TC 6629
Mr Malfi is the sole director of DSM Investments Ltd – a UK limited company. The company purchased 104 Commercial Street, London on 18 Dec 2003. Mr Malfi bought a property in Favart Road, London for £1.25 million jointly with Mr Omidi – contracts were exchanged on 1 Dec 2006 and the subsequent sale took place on 19 March 2007 funded as to:
- £945,000 joint loan from Nat West
- £178,865 from Mr Mafi &
- £178,865 from Mr Omidi
By a document dated 19 March 2007 Mr Malfi declared that he held his 50% share of this property on trust for his sister (MSM) who lived in Tehran.
The Favart Road property was sold to a third party for £1.8 million on 18 May 2007.
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Mr Malfi did not declare the proceeds of sale of Favart Road on his tax returns for either 2006/7 or 2007/8. Mr Malfi only acknowledged the existence of the declaration of trust in favour of his sister in a letter from his agent to HMRC of 30 April 2012. He took no advice about the legal implications of the trust using a standard form trust document obtained from his solicitor in 2003.
Mr Malfi is a businessman with experience of buying & selling property in the UK. His sister had no interest in his company or the benefit of any documents apart from the trust giving an interest in property in the UK.
The disposal of the Favart Road property into trust only came to HMRC’s attention when dealing with an inquiry into a later return re the dealings in another property in December 2011.
S.29 Taxes Management Act 1970 allows HMRC to raise an assessment when a loss of tax has been discovered which was brought about carelessly or deliberately at a time when the officer of HMRC could not have been reasonably expected to be aware of the situation.
S.36(1A) TMA 1970 extends the time limit for HMRC to make an assessment to 20 years if a person has acted deliberately in bringing about a loss of income tax or CGT.
S.95 TMA 1970 which applied at the time to penalties – in this case a total abatement of 65% was given leaving a penalty of 35% of the tax assessed:
- £99,454 CGT assessed as due
- £34,808 in penalties
Whilst the Tribunal accepted that Mr Mafi may not have fully understood whether & why a gain should be treated as arising in the 2006/7 tax year the real question was whether in failing to establish what was the correct legal & tax implications of his actions were Mr Malfi deliberately submitted an incorrect return. ‘Deliberately’ means intentionally or knowingly – Raymond Tooth  UKFTT 723.
It was held that Mr Malfi must have had some indication that there may be tax consequences as a result of signing the trust deed with his sister and that a failure to properly consider those consequences was a deliberate action on his part as was allowing his accountants to complete the 2006/7 tax return without reference to the disposal was a deliberate action. The tax bill and penalties suggested by HMRC were upheld.
Why would a solicitor provide a ‘standard’ trust document to a client? Trust deeds are supposed to be settled by a solicitor or a barrister and should be specific and advice upon their effect (both legal and tax) should be given.
Be suspicious if a client neither seeks advice nor explanation from you. Warn them that ignorance of the law is no escape from the impact of the law on their affairs.
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