Peter Hamilton: A lesson in competent advice

Late last year, a High Court judge dealt with a claim by a 95-year-old widow for  damages against Zurich Assurance Limited and Zurich Advice Network (Zurich) for failing to advise her on how to mitigate her potential inheritance tax liability on a substantial inherited portfolio.

The facts were that the claimant Mrs Lenderink-Woods was born in the UK. In 1944, she married her husband who was domiciled in the Netherlands. She left the UK in 1948 and has lived in Costa Rica since 1980. From 1996, she maintained an inherited portfolio of UK investments of around £567,000, which had a potential IHT liability of approximately £130,000.

In 2001, she sought advice from a Zurich adviser concerning her financial arrangements, in particular how to mitigate her  IHT exposure. He advised her to convert the portfolio into a loan trust scheme. This involved lending the proceeds of the portfolio to the trustees of a discretionary trust.

The trustees would invest the proceeds in investment bonds with Allied Dunbar and repay the loan over time by withdrawing 5 per cent of the value of the bonds per annum. The growth in the bonds would not fall into the claimant’s UK estate nor be subject to IHT, but the outstanding balance  and unspent repayments of the loan would fall into her estate and be subject to IHT.

The claimant followed that advice but she (and her daughters) did not understand how the scheme worked with withdrawals from capital rather than payment of interest and the level of charges.

In early 2012, the claimant sought advice from an IFA who realised she was not domiciled in the UK and that, while a loan trust scheme could be appropriate for a UK based-taxpayer, it was not appropriate for her. Had she been advised to invest the portfolio in offshore investments such as exempt gilts or offshore unit trusts, the portfolio would not have been subject to IHT .

The claimant’s case against Zurich was that no reasonably competent financial adviser could have advised as the adviser did because, as the judge said, “a reasonably competent financial adviser would have seen that [the claimant’s] domicile was a relevant factor to take into account in the shaping of what advice should be given to her in relation to her UK based assets”.

The claimant also said that the loan trust scheme was inappropriately inflexible for her because of the tax rules relating to the limits on annual withdrawals from bonds and the charges were too high when compared with direct investments.

The claimant issued proceedings on 10 December 2014, which was more than six years after she acted on the Zurich advice but less than three years after she received the advice from the IFA.

Zurich pleaded that the claim was statute-barred. Not only was the primary limitation period of six years long expired but Zurich asserted the claimant could not take advantage of the extended limitation period (under section 14A of the Limitation Act 1980) of three years from the time when she knew, or could with reasonable diligence have discovered, the facts on which her claim for negligence was based. Those facts were that for her, as someone not domiciled in the UK, there was a far more effective, simpler, cheaper and more flexible alternative to the loan trust scheme and the purchase of bonds.

Zurich said there was no realistic prospect of her being able to prove at trial that she first acquired the relevant knowledge within the three years of issuing proceedings (that is, after December 2011) and that therefore she could not take advantage of the three-year extended time limit under section 14A of the Act.

Zurich applied for the case to be dismissed without going to trial and for summary judgment under the rules of court that permit such applications in appropriate cases.

Mr Justice Norris heard Zurich’s application last October and, in December,  dismissed it. The judge decided there was at least a realistic prospect of establishing at the trial that first, the claimant did not have the requisite knowledge until after December 2011 so that her claim was not defeated by limitation and, second, the claimant was negligently advised by Zurich. If the case gets to trial, it will be interesting to see what transpires.

In the meantime, at least one lesson is clear. Where a client is not, and has not been, resident in the UK for a long time, and especially if they have married someone domiciled elsewhere, the question of domicile must be sorted out for IHT purposes so that the proper application of the rules is understood before investment advice is offered.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk