Money That Isn't Yours Yet

The rules on solicitors' client accounts are among the least negotiable in professional life.

Client money is kept separate. It is not mixed with office money, not used for cashflow, not borrowed against, and reconciled on a fixed cycle. Getting it wrong is not treated as an accounting slip. It goes to the Solicitors Disciplinary Tribunal, and people are struck off for it, sometimes without any dishonesty at all.

The principle underneath is straightforward. Holding money is not the same as owning it, and the distinction has to be maintained structurally rather than by good intentions.

A barrister holds a great deal of money that isn't theirs

Income tax. Payments on account. Class 4 National Insurance. VAT collected on fees and not yet due to HMRC. On a substantial practice these are not small sums, and they can sit for many months between arriving and leaving.

There is no rule requiring them to be kept anywhere in particular. They usually sit in a current account, alongside money that genuinely is yours, indistinguishable from it, quietly making the balance look considerably better than it is.

That is the first problem, and it is behavioural rather than financial. A large balance that is mostly HMRC's does not feel like a liability. It feels like a good year.

The second problem is that it earns nothing

A business current account typically pays little or nothing. For a barrister carrying a meaningful tax reserve across a full year, that is a real amount of foregone interest on money that has to sit somewhere anyway.

The options behave quite differently from one another.

Instant access and notice accounts are the simple end. Rates vary, notice periods trade access for yield, and the practical limit is the Financial Services Compensation Scheme protection of £85,000 per person per authorised institution. A reserve larger than that in one place is unprotected above the limit, which argues for spreading it.

Money market funds are used for larger balances and behave differently again. They are not deposits, are not FSCS protected, and carry investment risk, small though it usually is.

Then there are gilts, which suit this problem unusually well for anyone paying tax at the higher or additional rate. Gains on gilts are exempt from capital gains tax. A gilt bought below par and held to maturity therefore delivers the redemption gain free of CGT, with only the coupon taxable as income. Low-coupon gilts, where most of the return comes from the redemption gain rather than the coupon, are the ones where this matters most. For someone holding a known sum until a known date, which is exactly what a tax reserve is, the shape fits.

That is a structural feature of the tax system rather than a clever product, and it is not free of risk. A gilt sold before maturity can return less than was paid for it, and the CGT treatment does not change the fact that you have taken a capital loss.

The point

Cash carries its own risks. Inflation erodes it, the FSCS limit constrains it, and holding too much of it for too long has its own cost.

But none of that is an argument for leaving eighteen months of somebody else's money in a current account paying nothing, simply because no rule requires otherwise. Solicitors have that rule. The Bar has the same underlying problem and is left to work it out privately.

This article is general information based on legislation in force at the date of publication, which may change. It is not personal advice or a recommendation of any particular account, fund or holding. Tax treatment depends on individual circumstances. The value of investments, including gilts, can fall as well as rise, and gilts sold before maturity may return less than was paid for them.

Altor Wealth Management LLP advises barristers and other self-employed professionals from our offices in Hook, Hampshire, and across Surrey, Berkshire, Sussex and Kent.