Clause 2.4 and the rise of the professional ambulance chaser

A drafting criticism is not a court judgment. When a paid review begins with predictions of catastrophic tax consequences and ends with a recommendation to unwind or settle, clients are entitled to ask whether every realistic option has genuinely been considered.

Over the last few years, I have been shown a growing collection of reports, emails and approaches from supposedly independent professional advisers commenting on clause 2.4 of the trust deed drafted by Cotswold Barristers. The pattern has become increasingly familiar. The clause is isolated from the wider contractual arrangements, the most damaging possible interpretation is presented to an understandably worried client, and that client is then encouraged to pay for a detailed professional review.

Having paid for the review, the client seems remarkably likely to receive one of two recommendations: unwind the arrangements or settle with HMRC. In many cases, the same adviser who identified the supposed catastrophe is then available to undertake the further work needed to implement the unwind, negotiate with HMRC or pursue a complaint against the original professionals.

I have no objection whatsoever to clients obtaining independent advice. Property118 has always encouraged clients to involve their own accountants, solicitors, mortgage brokers and other professional advisers when making important commercial decisions. Nor do I believe that Property118, Cotswold Barristers or anybody else should be protected from legitimate scrutiny.

What concerns me is the difference between genuinely independent advice and a sales process dressed up as professional analysis. A proper independent review should start without a predetermined destination, examine the complete contractual and evidential position, consider every credible remedy, explain the consequences of each option and then allow the client to decide what best serves their commercial and personal interests.

When the journey starts with fear, moves rapidly to another invoice and ends with the reviewing adviser being paid to dismantle the original transaction, I struggle to find a more accurate description than professional ambulance chasing.

How clause 2.4 became a sales opportunity

The argument about clause 2.4 has been publicised extensively. The best-known criticism appeared in a Tax Policy Associates article published by Dan Neidle in November 2023. That article argued that the wording allowed the individual trustees to terminate the trust and recover the beneficial ownership of the properties from the company without payment. From that interpretation, it constructed several potentially serious tax consequences and concluded that the arrangements were defective from the outset.

Readers should be able to examine that criticism for themselves. They should also understand what it is and what it is not. It is a published professional opinion, not a judgment determining the meaning of clause 2.4, the legal effect of the complete contractual suite or the tax position of any individual Property118 client.

The incorporations were not implemented through clause 2.4 alone. They involved a wider suite of documents intended to give effect to a substantial commercial transaction chosen by the clients. Those clients had decided to incorporate established property rental businesses, with their companies becoming the intended owners of those businesses and the beneficial interests in the relevant properties, while registered legal title temporarily remained in their personal names.

The distinction between legal and beneficial ownership was commercially important. Many clients had numerous mortgages, valuable fixed interest rates, early repayment charges, cladding problems, lender restrictions or other circumstances that made an immediate transfer of registered title expensive, disruptive or impossible. Retaining legal title temporarily allowed refinancing to be considered property by property and at a time that made commercial sense, instead of forcing clients to refinance an entire portfolio on one day regardless of cost or market conditions.

The relevant tax framework included Incorporation Relief under section 162 of the Taxation of Chargeable Gains Act 1992, while HMRC’s own manuals explain both the concept of absolute entitlement under a bare trust and the treatment of business liabilities under Extra-Statutory Concession D32. Whether every requirement is satisfied in a particular client’s case depends upon that client’s documents, facts and evidence. It cannot sensibly be determined by lifting one provision from one document and treating it as though nothing else exists.

What can safely be said about Mark Smith’s (Cotswold Barristers) position

There are live proceedings involving substantive issues affecting individual clients. Mark Smith’s detailed legal arguments, supporting authorities, evidence and procedural strategy belong in those proceedings. They do not belong in an article made freely available to HMRC, hostile commentators and competing advisers before the case is heard.

I am therefore not going to publish a rehearsal of Mark Smith’s legal case or speculate publicly about every route by which the issues may be resolved. Anybody expecting Property118 to provide a convenient advance summary of his submissions will be disappointed. The proper forum for those arguments is the Tribunal, where they can be considered alongside the complete documents, contemporaneous evidence and submissions from both sides.

What can safely be said is that Mark Smith does not accept the critics’ interpretation of clause 2.4 or their assertion that the alleged tax consequences automatically follow. He continues to stand behind his advice and the clients’ position. The clients did not believe they were making a temporary transfer which they could reverse whenever they fancied, and they did not intend to retain a personal right to take the property businesses back from their companies for nothing.

The clients intended to incorporate their businesses. Their companies were intended to own those businesses and the associated beneficial interests, while legal title remained temporarily with the individuals because an immediate refinancing and conveyancing exercise was frequently commercially damaging or simply unavailable.

The precise legal significance of those intentions, the complete contractual documentation and the subsequent conduct of the parties is a matter for Mark Smith and the clients’ legal team to present. Declining to publish that case in advance should not be mistaken for an absence of legal analysis or treated as an invitation for competitors to declare themselves the winners before the arguments have even been heard.

Property118 did not draft clause 2.4 or any of the other legal documents. Our role was to understand what clients wanted to achieve, assess the commercial options available and make provisional recommendations. Clients decided whether they wished to explore those recommendations, after which Cotswold Barristers exercised its own professional judgment.

The published First-tier Tribunal judgment records evidence that a Property118 recommendation could be accepted, modified or rejected by the barrister dealing with the case. It also records that cases were rejected or returned where further information was required or the relevant requirements were not considered to be satisfied. That is very different from the caricature that Property118 invented a predetermined tax scheme and Cotswold Barristers simply processed every client placed before it.

The commercial decision belonged to each client. Professional advice was intended to establish whether the client’s chosen objectives could be implemented, not to invent those objectives for them.

The DOTAS result should have taught the critics some humility

Some of the commentary about clause 2.4 has been expressed with extraordinary certainty. Mark Smith’s advice has been called incompetent, and clients have been told that the structures were hopeless from the outset. We have heard that kind of professional certainty before.

Mark Smith’s analysis of the Disclosure of Tax Avoidance Schemes legislation was also publicly dismissed. HMRC subsequently issued Scheme Reference Numbers and Property118 and Cotswold Barristers appealed. Following a ten-day hearing involving extensive documentary evidence, client witnesses, professional witnesses and detailed legal submissions, the Tribunal allowed the appeals and cancelled HMRC’s decisions to issue the Scheme Reference Numbers.

The DOTAS judgment did not determine the meaning of clause 2.4 or decide the personal tax liabilities of individual clients. Property118 has never claimed that it did. It did, however, determine the issues that were before the Tribunal, and every DOTAS description relied upon by HMRC failed.

The Tribunal also examined the commercial background in considerable detail. It recorded evidence that clients wanted to preserve favourable mortgage terms, avoid early repayment charges, deal with cladding and lender restrictions, spread the cost of refinancing, manage liabilities and retain the freedom to remortgage when it became commercially advantageous. It concluded that obtaining the Incorporation Relief benefit was not the main purpose of the overall arrangements and that at least some clients would have proceeded for the non-tax benefits regardless of whether one or more expected tax advantages was available.

Those findings do not decide the remaining disputes, but they make one point particularly difficult to ignore. Confident professional criticism is not the same thing as a judicial determination, and people who were certain that Mark Smith’s DOTAS analysis was hopeless turned out to be wrong about the issue the Tribunal was actually asked to decide.

I have examined those findings separately in Seven findings in the Property118 Tribunal judgment critics seem reluctant to discuss. Clients being encouraged to pay for a fresh review should read the official judgment and reach their own conclusions about whether the outcome was merely the insignificant administrative technicality some competing advisers would now have them believe.

The missing question: why is rectification rarely considered?

Even if we assume, solely for the purpose of discussion, that the critics are right and that clause 2.4 failed to record the transaction intended by the clients and their companies, that does not automatically mean the transaction must be dismantled or that the client should surrender to HMRC.

English law recognises that a written instrument can sometimes fail to record the agreement or common intention of the parties. In appropriate circumstances, a court may be asked to rectify the document so that it records the transaction the parties actually intended to enter into. The legal and evidential threshold is necessarily demanding, the outcome can never be assumed and the suitability of such an application would have to be considered separately for each client.

To be absolutely clear, I am not disclosing Mark Smith’s litigation strategy, nor am I saying that rectification is the route being pursued in any particular appeal. I am asking a separate question about the quality and completeness of the supposedly independent advice being sold to Property118 clients.

If an adviser’s central allegation is that the written document failed to reflect the transaction everybody intended, why does a court application to correct the document so rarely appear to receive serious consideration? Why do so many reviews appear to move directly from identifying an alleged drafting problem to recommending that the client unwind the transaction or settle with HMRC?

There may be sound reasons why rectification would not be appropriate in a particular case. The contemporaneous evidence may be insufficient, the likely cost may be disproportionate, the client’s circumstances may favour a different route or specialist Counsel may conclude that the necessary requirements cannot be met. Any of those conclusions could form part of responsible professional advice, provided the issue has genuinely been examined and the reasoning is explained to the client.

What I have seen is plenty of material describing allegedly catastrophic tax consequences, plenty of recommendations to unwind and plenty of encouragement to negotiate a settlement with HMRC. I have seen far less evidence of advisers examining the clients’ original intentions, the complete contractual suite, the consideration provided, the company records, the subsequent operation of the business and the possible court remedies if one provision is said not to record the transaction everybody believed they were implementing.

That imbalance deserves an explanation. A review that identifies a supposed drafting failure but ignores the legal remedies potentially available when documents fail to record the parties’ intentions is not obviously a complete options analysis.

Unwinding and settlement are not neutral remedies

The word “unwind” sounds deceptively simple. It creates the impression that a client can cancel a document and return neatly to the position occupied before incorporation. That may be an attractive description for an adviser selling the work, but an established business cannot usually be reversed by pressing a reset button.

The company may have received rental income, paid property expenses, submitted accounts and tax returns, entered into contracts and dealt with tenants, lenders, managing agents and suppliers. Shares may have been issued, capital and director’s loan accounts recorded, properties refinanced or sold, and family succession arrangements developed around the company.

Attempting to reverse that position years later may require new transfers of assets or beneficial interests, amendments to company records and further accounting and tax treatment. It may affect mortgage arrangements, capital accounts, share values, succession planning and the client’s evidential position in the continuing HMRC dispute. Depending upon how it is implemented, the proposed cure may itself create new legal and tax questions.

An unwind may nevertheless be the right commercial decision for a particular client. The point is not that it should never be considered, but that its full consequences must be understood before anything is signed. A client should not surrender an existing position merely because a new adviser has presented the most hostile interpretation of one clause without properly examining the alternatives.

The same principle applies to settlement. Age, health, cost, stress, personal risk tolerance and the amount at stake may make certainty more valuable to one client than continuing the dispute. A fully informed client who decides to settle should not be criticised for making that choice.

A settlement does not establish that HMRC’s interpretation was correct. It establishes only that the client preferred an agreed conclusion to the cost and uncertainty of continued litigation. That can be a perfectly rational commercial decision, but it must remain the client’s decision after every material option has been explained, rather than the predetermined destination of the adviser’s review.

Follow the commercial incentives

Professional advisers are entitled to be paid for valuable work. There is nothing inherently improper about charging for an independent review, implementing an unwind, preparing revised tax computations, negotiating with HMRC or advising on a possible professional negligence claim.

However, the commercial interest should be transparent. A client should be told whether the adviser conducting the initial review, or any connected firm, expects to earn further fees if the client accepts the recommended course of action. The client should also understand whether the reviewer has considered alternatives that might not produce the same volume of additional work.

An initial review may lead to fees for reversing the incorporation, restructuring the company, amending accounts, negotiating a settlement and pursuing the original advisers. None of that proves the recommendation is wrong, but it makes independence of outcome particularly important.

In my opinion, the description “professional ambulance chasing” becomes justified where a worried client is approached at a vulnerable moment, the most alarming interpretation is amplified, realistic alternatives receive little or no attention and the adviser who diagnosed the disaster is then paid to manage the retreat. That is not a criticism of every professional who has questioned clause 2.4. It is a criticism of the pattern evident in too much of the material that has been shown to me.

What a genuinely independent review should contain

Before agreeing to unwind an incorporation or settle with HMRC, clients should expect clear written answers to several important questions. These are not technical traps. They are basic safeguards designed to establish whether the advice is genuinely independent and complete.

1. Has the adviser reviewed the entire contractual and evidential record?
   That should include the business sale documentation, trust deed, company records, share arrangements, accounts, contemporaneous advice, subsequent conduct and evidence of what the client and the company intended. Reading clause 2.4 in isolation is not a review of the transaction.
2. Has the adviser distinguished professional opinion from judicial determination?
   The client should be told clearly which propositions have been decided by a court, which remain disputed and which merely repeat the interpretation published by another commentator.
3. Have all potentially available remedies been considered?
   Where the allegation is that the document failed to record the intended transaction, the report should explain whether rectification or any other court remedy has been considered, what evidence would be required and why the adviser believes that route is or is not suitable.
4. What new consequences could the proposed unwind create?
   The advice should address the potential tax, company law, accounting, financing, succession and litigation consequences of the new transaction, rather than describing an unwind as though it simply deletes the original arrangements.
5. What will settlement achieve and what rights will be surrendered?
   The client should understand the amount payable, the issues being conceded, the effect on any connected years or transactions and whether settlement could influence complaints or claims against other professionals.
6. Who will earn further fees if the recommendation is accepted?
   The adviser should disclose the anticipated work, the likely cost and whether the same adviser or a connected firm expects to implement the unwind, negotiate the settlement or pursue the original professional team.

An adviser may answer every one of those questions properly and still recommend an unwind or settlement. That would at least be a reasoned professional conclusion based upon the client’s own position. What should concern clients is a review that barely acknowledges the alternatives before directing them towards capitulation.

Mark Smith’s advice should be tested, not prejudged

I am not claiming that clause 2.4 is immune from criticism, that every client has identical evidence or that every remaining issue must inevitably be resolved in the clients’ favour. I am saying that the critics’ interpretation has not acquired the force of law simply because it has been repeated frequently and confidently.

Mark Smith does not accept that interpretation. He continues to stand behind the advice he gave, and his detailed arguments will be presented where they belong. Clients should be allowed to hear and consider those arguments before being frightened into dismantling their businesses or conceding liabilities that remain disputed.

The DOTAS proceedings have already demonstrated why a little professional humility would be appropriate. Mark Smith’s position was publicly dismissed, HMRC pursued the case, and Property118 and Cotswold Barristers ultimately succeeded on every DOTAS description HMRC relied upon. That result does not guarantee the outcome of the remaining disputes, but it should make any responsible adviser hesitate before presenting their own opinion as though the Tribunal has already spoken.

Clients deserve genuine independent advice. They deserve to understand the strengths and risks of their position, the cost and consequences of every realistic option and the commercial interests of the people advising them. What they do not deserve is to be frightened by a predetermined analysis, charged for the diagnosis and then charged again to accept the adviser’s preferred cure.

The ambulance chasers may say they are protecting clients from the mistakes of others. Based on the material that has been shared with me, I believe some are using anxiety surrounding clause 2.4 to generate profitable instructions for themselves, while giving insufficient attention to the clients’ intentions, the complete documentation and the remedies that might preserve rather than destroy the transaction.

That may be commercially attractive to the new adviser. It should not be confused with a complete, balanced and genuinely independent assessment of what is best for the client.

This article expresses my personal opinion based upon professional reports, correspondence and recommendations that have been shared with me. It does not identify any reviewing adviser and should not be read as suggesting that every professional who has criticised clause 2.4 has acted improperly. It is general commentary rather than legal or tax advice. Every client’s documents, evidence, circumstances and procedural position must be considered individually.