How to survive LPC Tax
My clients are a lovely couple. They have just taken their first step onto the property ladder. Friendly, appreciative of my efforts until today, when I remembered they have to pay 2,000 stamp duty land tax.
Who cares that the sale went ahead as an asset sale instead of a share sale? Why does my client think I should have warned him there would be tax consequences? Who do they think I am? An accountant?
Apparently, over 40 per cent of inheritance tax paid each year is completely avoidable. This year, thanks to me, my clients will be making it 50 per cent.
I just sold an office block at auction for 3.5m. My client was thrilled. Star performer of the day he said. What will he say when he finds out I didnt state in the auction particulars that VAT is payable on the property? I thought you just paid VAT on CDs and takeaways. Now the purchaser can treat the price as being inclusive of VAT. I hope I can find an exemption and fast.
Whoever said that ignorance is bliss was, well, ignorant. Where tax is concerned, ignorance is costly. At best, you lose a client. At worst, you lose a client, your firm gets sued for professional negligence and you have to start job-hunting again.
What taxes do you need to know?
Tax isnt easy. Even Albert Einstein admitted that the hardest thing in the world to understand is the income tax. Lucky for him, then, that there was no such thing as capital gains tax in his day.
You are not so lucky. As a wannabe solicitor you will need to know about income tax, capital gains tax, corporation tax, inheritance tax, National Insurance contributions, stamp duty, stamp duty land tax and VAT. Thats a lot of tax and unfortunately all of it is compulsory on the Legal Practice Course (LPC).
Thankfully, some taxes are more significant than others, so you wont have to learn them all in detail. The key ones are income tax, capital gains tax, corporation tax and inheritance tax. The first three love business, while inheritance tax favours probate.
If youve had a summer job or got a few quid in the bank, youve already paid income tax. Its charged on a wide range of recurring payments, including salaries, interest on savings and dividends. As such, it pops up in all sorts of legal transactions. Income tax rates are high, being 10 per cent, 22 per cent and 40 per cent, so when it does arise often results in a big bill. Therefore, you need to know when a charge to income tax might be triggered and how to avoid it if you can.
Capital Gains Tax (CGT)
CGT might be triggered if you get your hands on a one-off chunk of money, so watch out if the painting above your fireplace turns out to be a Rembrandt. All sorts of assets are chargeable to CGT unless theyre specifically exempt, so CGT can rear its ugly head on the sale of land, shares, valuable antiques etc. CGT is charged at your highest applicable income tax rate, which means the taxman could snaffle as much as 40 per cent of your Rembrandt. However, there are some sophisticated exemptions and reliefs, which a clued-up lawyer can exploit to reduce their clients tax bill.
Corporation tax is paid by companies on income profits and capital gains. The rules are complex, with rates of corporation tax ranging from 20 per cent to 32.5 per cent (the main rate being 30 per cent). In addition, there are some tricky reliefs available, so companies will always value solid legal advice on these. Therefore, a good understanding of corporation is essential if you count companies as some of your clients.
Inheritance Tax (IHT)
IHT is paid on inheritances, although you may be surprised to learn that you can inherit money, and pay IHT on it, long before anyone pops their clogs. Indeed, even though there is a nil rate band worth 300,000, the IHT net catches more estates every year. At 20 per cent and 40 per cent, the rates of IHT are high, so your clients will expect you to be an expert in the many exemptions and reliefs that can be manipulated to keep their bill as low as possible.
Most LPCs have a foundation course that helps you learn about the different taxes in isolation. That way, you can get to grips with the fundamentals, without being distracted by lots of law.
The core subjects will cover tax in a range of transactional contexts. This will help you to spot the red flags that warn you of pending tax issues, as well as ensure that you know what advice to give your client.
You must know which tax applies in any given scenario, so understanding what triggers each tax is essential. However, you dont need to go beyond basic advice, so stick with the course materials and dont waste your money on extra books.
Dont let your fear of maths fog your brain before youve even started the course. True, there will be some arithmetic involved, but nothing that a basic calculator cant handle just make sure it has a % button.
Learn the jargon. If you are told that a figure represents taxable income, for example, you need to know what that means and how it differs from statutory income or a charge on income.
Check your understanding by completing any practice exercises. Dont try to do them all in one evening, but dont let them build up either. Just work at a sensible pace.
You will be assessed in tax, but there isnt a dedicated tax paper. Instead, it will appear in other assessments, such as business. Its unlikely youll be asked to do complex calculations. Instead, you will be expected to identify the relevant tax, explain how it works, identify available exemptions and reliefs, and give practical advice to your client. Therefore, you might wish to prepare a short checklist for each tax that sets out in a logical order all the factors you need to consider. Apart from consolidating your understanding of each tax, youll end up with a set of useful revision notes.
You dont have to be brilliant at tax in order to pass the LPC. You just need a good grasp of the basics. Besides, most students enjoy tax as its a refreshing change from all that law.
Pamela Henderson, Academic Team Leader at Nottingham Law School