LZW Law Limited - 560356

Decisions

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Decision - Agreement

Outcome: Regulatory settlement agreement

Outcome date: 18 December 2014

Published date: 7 January 2015

Registration year: 2014/2015

Firm details

Firm name: LZW Law Limited

Firm address: 10 Bickels Yard, 151-153 Bermondsey Street, London, SE1 3HA

SRA ID: 560356

Decision details

This outcome was reached by agreement.

Reasons/basis

  • 1. LZW Law Limited of 10 Bickels Yard, 151 - 153 Bermondsey Street, London, SE1 3HA ("the firm") agrees to the following outcome of the investigation into its professional conduct under reference AI/1046568.

Background

  • 2. On 3 October 2012, the Forensic Investigation Department ("FI") of the Solicitors Regulation Authority ("SRA") carried out an inspection of the firm's books of account and other documents.
  • 3. On 10 January 2013 the SRA produced its report.
  • 4. During the course of the inspection, the firm provided details of conveyancing transactions in which its clients used Stamp Duty Land Tax ("SDLT") mitigation or avoidance schemes.
  • 5. The firm has dealt with schemes promoted by:
    • Strategic Ideas Limited – 130 transactions;
    • Equity Tax – 35 transactions;
    • Cornerstone Tax Advisors – 28 transactions;
    • Premier Strategies – 3 transactions;
    • Mulbury Hamilton – 3 transactions;
    • Quantum – 2 transactions;
    • S Tax – 1 transaction;
    • EDF Tax – 1 transaction.
  • 6. The report identified that, between April 2011 and March 2012, the firm had undertaken 203 conveyancing transactions where clients had been a party to a SDLT scheme to avoid paying stamp duty.
  • 7. The firm charged purchaser clients additional sums between £250 and £500 for the extra work involved in implementing the schemes.
  • 8. The firm implemented the following schemes:
    • Option scheme – 103 transactions;
    • Unlimited company scheme – 91 transactions;
    • Husband and wife scheme – 8 transactions;
    • Trust – 1 transaction.

The major schemes used

Option scheme
  • 9. The buyers buy the property, and immediately after completion grant, for £1, an option to an offshore company to buy the property.
  • 10. The option terms are that the offshore company has an option to buy the property, between 25 and 30 years in the future, after the expiry of any original mortgage term but only for the then open market value or the original purchase price whichever was the greater. The option terms also include, amongst others, provisions preventing the grantee from registering the option at the Land Registry and the option's automatic termination should a mortgagee enter into possession.
  • 11. The option agreement was intended to permanently delay the effect of the s75A Finance Act 2003 and so the buyers would not need to pay SDLT.
Unlimited company
  • 12. The buyers set up a special purpose vehicle ("the company"), whose specific purpose was to buy the property from the seller. The buyers would be the sole shareholders and have control of the company.
  • 13. The buyers then wound up the company, which distributed its assets to its shareholders, namely the buyers.
  • 14. In accordance with the scheme methodology, the firm reported the second transaction (the transfer of the property from the unlimited company to the shareholders) as a distribution of assets, and therefore not one subject to SDLT, as it was not a land transaction.

Use of the schemes

  • 15. The principal aim was not only to convey title but also to enable the purchaser client to either avoid or minimise paying SDLT.
  • 16. HMRC issued technical newsletters in August 2007 and June 2010, which demonstrated that HMRC did not consider the schemes to be legitimate tax avoidance schemes especially since the introduction of anti-avoidance legislation in December 2006. HMRC has not formally challenged any of these schemes in the First-tier tax Tribunal but brought in retrospective legislation.

Acting in clients' best interests

  • 17. The firm had an obligation to disclose to its clients (both purchaser and lender) all information material to the matter.

Lender clients

  • 18. In 179 of the matters the firm also acted for the mortgage provider ("the lenders"). No lenders were involved in husband and wife scheme cases.
  • 19. Unless the lender's terms made a specific request, the firm did not consider it necessary to tell the lenders that the purchaser client was using a SDLT scheme to avoid paying stamp duty land tax and, for the same reason, nor did it tell the lenders how the transactions were structured.
  • 20. Therefore the firm did not give material information to the lenders which enabled them to reach an informed decision as to whether to proceed with the mortgage offer or renegotiate terms.
  • 21. The firm took Counsel's advice on the issue, which the firm considered supported its view that it need not tell lenders about the use of such schemes. However the advice came from the same Counsel who had advised on implementing the schemes.
  • 22. The firm did not inform their lender clients that, in some cases, options to third parties had been granted with completion dates to take place in the future as it did not consider the information relevant to the lender's security.
  • 23. In failing to disclose material information, the firm failed to act in the best interests of their lender clients.

Buyer clients

  • 24. In relation to the option schemes, the firm did not advise the buyers as to the consequences of entering into such schemes, and the effect that the option agreement might have on any future dealings that involved the property. For example, re-mortgage, estate planning or future sale. The firm did not consider that these might have been compromised by an unregistered option to purchase at market rate or original purchase price whichever was the higher, which the firm did not consider was intended, in reality, to be taken up.

Conflict of interests

  • 25. The firm acted where there was a conflict between the interests of the lenders and buyers in those transactions involving a mortgage. A conflict or significant risk of conflict existed between the lenders and buyers because the firm owed separate duties to act in the best interests of both the lenders and buyers in relation to the same transactions.

Mitigation

  • 26. The firm asserts the following:
  • 26.1. It no longer implements any of the SDLT schemes and ceased implementing the schemes by March 2013.
  • 26.2. It disclosed the schemes to HMRC, using a letter drafted by Counsel. The firm has confirmed that HMRC has raised enquiries into all SDLT matters on which it acted although none of these enquiries have resulted in a finding that the schemes are not successful.
  • 26.3. It held regular meetings at which the directors discussed Counsel's opinion on the schemes and whether to disclose to lenders, (concluding that the schemes did not impact negatively on lenders' security) and obtained a further opinion when the law changed.
  • 26.4. Its clients were sophisticated investors who had all taken specific advice as to the risks of the schemes before instructing the firm.
  • 26.5. None of its clients (buyer or lender) have complained about the implementation of the schemes.
  • 27. The firm has co-operated with the SRA and has a clean disciplinary history.

Outcome

  • 28. The firm makes, and the SRA accepts, the following admissions:
  • 28.1. The firm failed, alternatively facilitated, permitted or acquiesced in a failure to disclose material information to lender and/or purchaser clients, and in so doing failed to act in the clients' best interests contrary to Rules 1.04 and1.05 of the Solicitors Code of Conduct 2007 ("SCC") up to 5 October 2011 and from 6 October 2011, they breached Principles 4 and 5 of the SRA Principles 2011 and failed to achieve Outcomes O (1.2) and O (4.2) of the SRA Code of Conduct 2011.
  • 28.2. The firm acted in transactions where there was a conflict or a significant risk of a conflict between the interests of two or more clients contrary to Rules 3.01 (1) and (2) (a) of the SCC 2007 up to 5 October 2011 and from 6 October 2011, they breached Principles 4, and 5, of the SRA Principles 2011 and failed to achieve Outcome O (3.5) of the SRA Code of Conduct 2011.
  • 29. The firm is fined £2,000.00 for the breaches identified above.
  • 30. The firm agrees to pay the costs of the SRA in the sum of £6,965.00 within 28 days of receipt of an invoice from the SRA .
  • 31. This Regulatory Settlement Agreement will be published by the SRA and may be disclosed by the SRA as it sees fit or may be disclosed to any person upon request otherwise.
  • 32. The firm agrees that it will not act in any way inconsistent with this agreement by, for example, by denying the misconduct set out above.
  • 33. If the firm acts in any way inconsistent with this agreement, they accept that the issues may be referred back to the SRA for consideration or referral of their conduct to the Solicitors Disciplinary Tribunal on the original facts and allegations and also on the basis that a failure to comply with this agreement may constitute a breach of Principles 2, 6 and 7 of the SRA Code of Conduct 2011.

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