SQE1 client money: what you must know and how it is tested

SQE1 client money questions test what counts as client money, what a firm must do with it and how to correct mistakes under the SRA Accounts Rules. The rules protect clients, so the safe answer is usually the one that keeps the money separate and returns it promptly. Read it with the wider Solicitors Accounts guide.

The rules to apply

Client money is money held or received for a client or a third party in the course of providing services, including money held as a stakeholder, funds for completion, and payments on account of costs not yet billed. Money for a bill already delivered is office money. The firm must pay client money into a client account promptly and keep it separate from the firm's money. It holds client money on trust.

Client money may be used only for the client it belongs to. A firm must never use one client's money for another (so a client ledger must never be overdrawn). It must not use a client account as a banking facility, passing money through when there is no underlying legal service. Money may leave the client account only for proper reasons: payment to or on behalf of the client, payment of the firm's costs once a bill or other written notification of costs has been given, or payment of disbursements. A payment out should normally be made against cleared funds.

Mistakes. A firm must put right any breach promptly on discovery, including paying back from its own money any shortfall caused by a breach. The firm should report a serious breach to the SRA. Funds should be returned to the client or third party promptly when the reason for holding them ends. Interest: the firm must account to the client for a fair sum of interest on client money it holds. The firm must keep proper accounting records and reconcile them at least every five weeks.

In practice, in a property matter, money from the client for the deposit, SDLT and Land Registry fees is client money, and so is the sale price received from a buyer. Mortgage money from a lender is also client money. The firm's fee is taken from the client account only after a bill or other written notification of costs.

Traps examiners use

• Treating a payment on account of costs as the firm's own money before billing.
• Using a client account to hold or pass money without a legal service.
• Letting a client ledger go into debit.
• Paying out against uncleared funds.
• Waiting for a client to ask before returning money no longer needed.
• Thinking the firm may repair a shortfall later by taking its next fee.

Worked question 1

Hana instructs a firm on her purchase and pays £5,000 on account of the firm's costs before any bill. How should the firm treat the money?

• A. As office money, because it is for the firm's fees.
• B. As client money, to be paid into the client account until the bill is delivered.
• C. As office money if Hana agrees in writing.
• D. As the firm's income when received.
• E. As neither, so it can be held in cash.

Answer: B. A payment on account of costs not yet billed is client money and must be paid into the client account promptly. It becomes the firm's money only when the firm delivers a bill or gives written notification of its costs. A, C and D treat it as the firm's income too early.

Worked question 2

A firm's accountant finds that £10,000 of Client A's money was used to complete Client B's purchase, because Client B's ledger was short. What must the firm do?

• A. Do nothing because the money has been spent.
• B. Correct the shortfall at once from its own money and consider reporting the breach to the SRA.
• C. Wait for Client B to pay and then repay Client A.
• D. Tell Client A and ask for consent to the loan.
• E. Take the money from Client A's next fee.

Answer: B. Client money cannot be used for another client. The firm must pay back the amount from its own resources immediately, and consider whether the breach is serious enough to report. C and D allow the breach to continue, and E makes things worse.

Checklist before you move on

• Is it client money (including payments on account of costs)?
• Paid promptly into the client account?
• Used only for the client it belongs to?
• Withdrawal for a proper purpose against cleared funds?
• Bill or written notification before taking fees?
• Any breach put right at once and reported if serious?

Test yourself on more original questions in our SQE1 practice questions.

Questions

Related

• SQE1 Solicitors Accounts
• SQE1 practice questions: how to answer single best answer items
• SQE1 mock: how to time, pace and review it

Sources: SRA: SQE1 Assessment Specification (from 1 September 2026); SRA Accounts Rules; SRA: Accounts Rules guidance. Checked 10 November 2026.