Grieving families are among those set to be hit by a proposed £100m “tax” on the interest made from money sitting in lawyers’ client accounts, experts have warned.
Lawyers often handle money from a deceased person’s estate when they are going through probate, or when their clients are going through property transactions.
This cash generates interest, some of which is then passed on to the clients when a property sale or purchase goes through, or the administration of a dead person’s estate is finished and the funds are sent to those inheriting it.
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Under new proposals set out by the Government this month, a large proportion of this money would instead be sent to the Ministry of Justice.
But experts have said this amounts to a “tax through the back door”.
Andrew Sanford, a partner at tax and accounting firm Blick Rothenberg, described it as an “egregious form of government enrichment” and warned that in many drawn-out probate cases, the interest could amount to hundreds of pounds, or in some cases more.
“It really could affect those who are particularly disadvantaged. Probate processes can be held up by disputes, and delays in processing the probate and inheritance tax claims. All the time there are these delays, more interest on the held funds could be going to the government.
“The same could apply to clients who are going through the process of receiving personal injury claims or going through divorce.
“This has been slipped out with little public pronouncement and could well affect the vulnerable or bereaved from interest they are clearly entitled to. It is essentially a tax through the back door”.
Dan Neidle, founder of tax campaign group Tax Policy Associates, said there were questions over who would end up paying for the effective tax increase.
He said: “Is it the lawyers? Or is it their clients, when they’ve large amounts in their lawyers’ client accounts, particularly during property transactions and probate? Either way, this is in effect a tax increase – the only question is who pays it.”
Money can be held by lawyers in different types of accounts, including pooled accounts – where multiple clients’ money is held together – and individual accounts – held for single clients.
On the pooled accounts, the Government has proposed that 75 per cent of the total interest is sent directly to them, but says: “We welcome the views of respondents on whether a higher proportion, such as 90 per cent or 100 per cent interest.”
With individual accounts, it has proposed a lower sum of 50 per cent of interest is sent to it.
These individual accounts are often used for larger, longer-term work, such as for probate or corporate transactions, experts say.
Not all interest on pooled accounts is always given to clients – with lawyers often using some to fund their services – but rules set out by the Solicitors Regulation Authority say they must send a “fair sum” on.
Polling by the Ministry of Justice previously suggested that a third (33 per cent) of firms always sent all interest from pooled client accounts to clients, while over half (53 per cent) did so partially or sometimes.
The Ministry of Justice said the proposals were part of an exercise to try to improve the justice system.
A Ministry of Justice spokesperson said: “This Government inherited a justice system in crisis. Years of underinvestment have taken their toll – leading to increasing backlogs in our courts and a crisis in our prisons.
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“We’re exploring how interest earned on accounts – a tried and tested idea already operating in many countries around the world – could be invested to strengthen our justice system, making it fairer and more accessible for all.”
Its analysis suggests that, depending on interest rates, the move could be expected to raise over £100m per year.
The consultation on the proposals runs until next month.
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