Barker v Baxendale Walker Solicitors (a firm) & Anor

A solicitor who advises that a statutory construction is correct may still owe a duty to warn that a court might adopt a contrary construction. The question is highly fact-sensitive. It depends on the strength of the competing construction, the likelihood of challenge, the importance of the issue and the consequences for the client. The alternatives need not be finely balanced.

Where a tax-avoidance scheme depended on a contentious construction, involved substantial tax and was likely to attract scrutiny, a reasonably competent specialist had to warn of the significant risk that the scheme would fail. That duty arose even though adopting the advised construction was not itself negligent.

The appellant obtained specialist advice from the respondents about an employee benefit trust intended to avoid Capital Gains Tax and Inheritance Tax. The scheme contemplated that the appellant’s family could benefit after his death. HMRC later contended that Inheritance Tax Act 1984, section 28(4), prevented the intended exemption because the family were connected with a participator when the shares were transferred.

Roth J held that the respondents should have given a general warning about possible challenge but were not obliged to warn specifically of the post-death exclusion construction. He found that a specific warning would have caused the appellant to abandon the scheme.

The appellant appealed on the ground that a reasonably competent specialist should have warned of the significant risk that HMRC’s construction was correct.

1. Appeal allowed. The respondents negligently failed to warn that there was a significant risk that the employee benefit trust would not obtain the intended tax relief.

2. Section 28(4) of the Inheritance Tax Act 1984 was very likely to bear HMRC’s construction. Whether the settlement permitted property to be applied to prohibited beneficiaries had to be examined at the date of the transfer of value. Membership of a prohibited class at that date was fatal even if the beneficiary would have ceased to belong to that class when property was later applied. The words “at any time” extended the enquiry throughout the settlement’s lifetime. The respondents’ construction gave those words insufficient weight, required extensive implication and created uncertainty about when property was “applied”.

3. A solicitor’s duty to warn that a court may reject the advised construction is highly fact-sensitive. Clear statutory language will rarely create a significant risk requiring a caveat. A solicitor may nevertheless construe a provision competently, or even correctly, while negligently failing to warn of a sufficiently significant contrary construction. The competing arguments need not be finely balanced. Relevant circumstances include their strength, the likelihood of litigation or challenge, the importance of the provision and the consequences for the client.

4. This aggressive tax-avoidance scheme depended centrally on the appellant’s family benefiting after his death. The tax at stake was very large, the respondents charged a substantial fee and HMRC challenge was an obvious prospect. A reasonably competent specialist would therefore have given the specific warning, even though taking the respondents’ preferred construction was not alleged to be negligent.

5. The court, rather than an unrepresentative collection of advisers who had considered the scheme for different purposes, had to assess the significant risk by applying the standard of the reasonably competent solicitor. There was no expert evidence establishing a responsible body of professional opinion.

6. Henderson LJ added that, if the trust deed itself excluded the connected beneficiaries sufficiently to preserve the exemption, it could not achieve the objective for which the scheme had been sold. Patten LJ agreed that a competent assessment of the rival constructions would at least have disclosed a significant possibility that “at any time” bore its ordinary meaning.

1. Court of Appeal (Civil Division): By judgment dated 8 December 2017, the court unanimously allowed the appeal and held that the respondents should have given the specific warning.
2. High Court, Chancery Division: By judgment dated 23 March 2016, Roth J found a breach in failing to give a general warning but held that no reasonably careful and competent specialist was required to warn specifically of the post-death exclusion construction.