Is mediation the answer to my dispute with HMRC?

During the past two years, HM Revenue & Customs has been investigating my affairs, having identified that I have some bank affairs overseas, which were set up by my late parents. I have tried to explain that I was not aware of any tax issues when signing the papers given to me in my youth but so far HMRC has refused to cancel the hefty penalties. A friend has suggested mediation, but I’m not sure what this would involve. Is this a worthwhile avenue to explore?

Talia Greenbaum, partner and head of tax mediation at accountancy and business advisory firm BDO, says it is not surprising that the overseas tax issues in your case have potentially resulted in significant penalties.

Penalties that HMRC seeks to impose following a tax investigation are based on its assessment of the behaviour of the taxpayer. Depending on culpability these can go up to 100 per cent for UK matters and an eye-watering 200 per cent (or beyond) for some overseas matters.

Under the circumstances, your friend is absolutely correct that mediation, otherwise known as alternative dispute resolution (ADR), is an avenue worth exploring. It can facilitate the settlement of difficult disputes with HMRC over the course of a single day.

ADR is facilitated by one or two mediators, although decision making remains with the taxpayer and HMRC. A series of joint meetings and private meetings with either the taxpayer or HMRC are used during a mediation day to explore the issues, negotiate the terms of any settlement and seek a final resolution to the dispute. Any settlement discussions are without prejudice and non-binding unless and until they are documented in an exit agreement signed by both parties.

ADR is best suited to fact-heavy disputes with HMRC. It is an excellent environment to explore and agree the facts and discuss whether they are relevant or material to the tax or penalty outcome.

In your case, establishing exactly what you were aware of both in your youth when signing papers and in subsequent years — plus considering whether you ever sought or obtained professional advice — will be relevant in agreeing your behaviour with HMRC at mediation.

Latest HMRC statistics indicate that approximately 80 per cent of disputes that engaged in the ADR process end with a settlement agreement. For most taxpayers, settling through mediation is likely to be preferable than going to tribunal, where HMRC succeed in 86 per cent of cases.

Before you start the process, ensure that your penalty is appealed as appropriate within the statutory timeframe. Failure to do so will mean that the penalty determination by HMRC is final and there is no “live” dispute to mediate.

My wife’s setting up a trust on her estate. What are my rights?

My wife and I have four grown-up children. Our house is solely in my wife’s name. She is considering setting up a trust so she leaves her estate to our children, with me having the right to continue to live in our home for the rest of my life. Our house is worth about £500,000 and she has other assets of £200,000, mainly from inheritances. I feel I will seem like a lodger in this scenario! What are my rights and can she do this? We are happily married. I think she just doesn’t want any disputes with family if she were to die first. I am 73 and she is 62.

Christopher Groves, partner in the private client and tax team at Withers, says he is reminded of the scene from the film The Shawshank Redemption when Andy asks Captain Hadley: “Do you trust your wife?” He nearly ends up being thrown off the roof of the prison. Ultimately, of course, it secured Andy his trusted status.

Conversations about inheritance and control of assets can be difficult and it is important that the motivations and sentiments of all parties are considered openly.

The primary function of a trust is to separate the enjoyment of an asset from its legal ownership, which is held by trustees. This allows someone, in this case your wife, to ensure that you can continue to live in your home after her death but gives her the security that your children will ultimately inherit it. Many people use trusts to provide for their widowed spouses as it also secures the inheritance tax exemption that applies to gifts between spouses.

Under English law, you have the right to demand reasonable financial provision from your wife’s estate. This is likely to include your matrimonial home. Ultimately, though, to enforce those rights you would have to go to court and the opposite parties would be your children. That is something to be avoided, not least because of the legal costs that would need to be paid from your wife’s estate. Jarndyce vs Jarndyce may be fiction (from Dickens’ Bleak House) but is grounded in the reality that legal costs can consume an entire estate in such cases. Better by far to reach a compromise in your lifetimes.

If your wife’s concern is to ensure that if she dies first, your children will inherit your house on your death, this could also be achieved by you both executing “mutual wills”, under which the surviving party cannot change their will after the death of the first to die. So if you both left your estates to each other, failing which to your children, you would both know that whoever died first, your children would ultimately inherit.

If your wife’s concern is that your personal finances are precarious and there is a possibility that you might be forced to mortgage or sell the house to meet other debts, then ownership by a trust would protect the house from that and ensure that you would always have somewhere to live. The trust could therefore be to your advantage.

You don’t say if your wife also intends to appoint you as a trustee. This is not uncommon in such situations and would give you a say in the ownership of the house. It is a role that you could take on with your children who would then be able to support you in dealing with the ownership of the house. This might give your wife the security she wants without leaving you feeling like a lodger.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.