ABOUT THE AUTHOR: Advocate Richard Wakeham is an
Associate at Sinels Advocates, Jersey
O n 9 March 2011, the English Court of Appeal delivered judgment
in the twinned appeals of Pitt v Holt and
Futter v Futter. The Court of Appeal
rejected entirely what has become known as ‘the rule in Re
Hastings-Bass’ and clarified the equitable jurisdiction in England
to remedy the ill effects of erroneous tax advice. The leading
judgment of Lloyd LJ contains a rigorous analysis of the principles
underpinning, and a full assessment of the cases that have applied,
‘the rule’ and the doctrine of mistake.
These principles are of great significance in the offshore world
as they provide a basis for trustees (and tax advisors) to set
aside transactions resulting in unintended tax consequences. The
legal principles detailed in the conjoined appeals challenge this
practice and raise the question as to whether it ought to be
permitted to continue. Although the decision is potentially subject
to an appeal to the Supreme Court and it is open to other
jurisdictions to take an alternative approach, the judgment is of
great interest because, at the very least, it may well signify the
end of the era of ‘get out of jail free cards’ for trustees and tax
advisors where transactions have been entered on the basis of
erroneous tax advice.
What is ‘the rule in Re
Hastings-Bass’?
To recap, the ‘rule’ refers to the court’s (purported) power to
set aside a trustee’s exercise of discretion or power when its
effect is otherwise than intended and the trustee would not have
acted as he did having either ignored relevant considerations or
considered irrelevant matters.
Over the last two decades or so, it has ordinarily been a
failure to consider the actual (and adverse) fiscal implications of
a transaction that has given cause for trustees to ask the court to
exercise its equitable jurisdiction to set aside decisions based on
erroneous tax advice. Revisiting these decisions has been
beneficial to trustees and tax advisors as it has enabled them to
avoid liability for their errors.
What were the claims about?
Pitt v Holt concerned a claim to set aside a
transfer to trust of the proceeds of a structured settlement claim
made pursuant to professional advice and under which Mr Pitt was
entitled to a lump sum and monthly payments in respect of serious
injuries that had been occasioned to him in a road accident. Post
settlement, it was realised that the transfer into trust attracted
inheritance tax in the same manner as any transfer into any
discretionary trust. It was claimed that the settlement into trust
was voidable under the principles espoused in Re
Hastings-Bass or otherwise on the ground
of mistake. The trial judge ordered that the transactions be set
aside under the Hastings-Bass rule but held that he would not have
set aside the transactions on the basis of mistake. The Court of
Appeal rejected both claims.
Futter v Futter concerned a more typical claim
in this area arising from the exercise of powers of enlargement and
advancement by offshore trustees acting under professional tax
advice from London lawyers with the object of avoiding a charge to
capital gains tax on stockpiled gains. The trial judge ordered that
the transactions be set aside under ‘the rule’ such that he did not
need to consider the argument that the same were also vitiated on
the ground of mistake. Again, the Court of Appeal rejected both
claims.
What is the effect of the decision?
Lloyd LJ’s judgment emphatically confirms that, as a matter of
English law, the decision in Re Hastings-Bass has been
misunderstood and misapplied since at least 1990. The
misunderstanding was found to have grown from Warner J’s
misinterpretation of ‘the rule’ in Mettoy Pension Trustees
Limited v Evans [1990] 1 WLR 1587, which had
subsequently been followed in numerous other cases. The judgments
of Lloyd LJ and Mummery LJ allow two clear principles to emerge
from the shadow of what had become known as ‘the rule’.
First, a purported exercise of power will be void and
ineffective where there is a fraud on the power or the exercise is
beyond power. Secondly, an exercise of power will be voidable where
the trustee has disregarded relevant considerations or has had
regard to irrelevant considerations. The exercise is voidable at
the instance of the beneficiaries on the basis that the same
constituted a breach of fiduciary duty by the trustee. The trustee
will not be permitted to make the application. Where the power is
exercised for fiscal advantage, the trustee will not be liable if
advice has been taken from an appropriately qualified and competent
tax advisor. There the remedy will likely lie against the tax
advisor.
It is far from clear that the decision will be followed in other
offshore jurisdictions. At least insofar as Jersey is concerned
(and likely elsewhere), there are strong arguments for and against
following the recent decision in this respect.
Each of the seven reported cases in Jersey has
referred to and followed Re Hastings-Bass. Further, all
bar one of those cases referred to
and applied the three stage test espoused in Mettoy
(the case in which the Court of Appeal considered corrupted
equitable principles by the judicial invention of ‘the rule’). It
is therefore arguable that if the English decisions are plainly
wrong in principle then it is wrong for them to be followed in the
future. Additionally, it is arguable that the absence of
adversarial argument (from the HMRC or another interested party) in
each of these cases has prevented the court from finding against
the existence of ‘the rule’.
However, against this it must be remembered that, first, the
Jersey court is not bound to follow any decision of any foreign
court and, secondly, the Jersey court will not depart from its
earlier decisions unless persuaded that its earlier decision was
wrongly decided. While it is now plainly arguable that these
earlier decisions should be ignored as unsafe as they were based on
a misunderstanding of relevant principles, the existence and
content of the preceding case law cannot be ignored. There are at
least two good reasons why ‘the rule’ could not be followed in
Jersey (and elsewhere).
First, despite its name, ‘the rule’ did not originate from the
case of Re Hastings-Bass but, as was noted by Birt, Deputy
Bailiff (as he then was) in In the Matter of the Green GLG
Trust, ‘the rule’ existed prior to
that case and this much was ‘entirely consistent with precedent and
principle’.
Secondly, irrespective of argument as to the origin of ‘the
rule’, as it is arguable that it is consistent with principle (if
not now English precedent), public policy considerations might
allow a different path to be followed. In four of
the seven cases the Jersey court has, as a matter of public policy,
rejected the idea of encouraging the trustee to suffer the tax
consequences arising from erroneous advice and pursue its remedies
against the tax advisors. For obvious reasons, public policy
considerations onshore are different to those offshore and provide
cogent reason for maintaining ‘the rule’ offshore rather than
encouraging the proliferation of adversarial litigation.
What is the effect of the decision on
mistake?
The English Court of Appeal restated the rule for setting aside
voluntary transactions on the basis of mistake. To invoke the
court’s equitable jurisdiction, it was held that the donor must be
mistaken as to the legal effect (as compared with the consequence)
of the disposition or an existing fact that is fundamental to the
transaction and the mistake must be so serious in its character as
to render it unjust for the recipient to retain the benefit of the
gift. It was also specifically held that the creation of unforeseen
tax liabilities is a consequence (not an effect) that will be
insufficient to enliven the jurisdiction.
This statement as to the English law position is quite apposite
given the relatively recent collection of decisions in
Jersey and Guernsey on
point, some of which have required the application of English law
because the trusts involved were governed by English law. While the
recent decision of the English Court of Appeal will clearly assist
in determining the question of mistake in relation to English law
trusts, it might not have a significant bearing on the same
question in relation to Jersey law trusts. The Jersey cases
referred to have made clear that making a distinction between the
effects and consequences of a transaction is unattractive to
dealing with matters of this nature. Instead, the test is whether
the mistake of law or fact is such that the settlor would not have
entered into the transaction ‘but for’ the mistake in question.
Given this recently settled law on point, it is unlikely that the
recent decision will have any bearing on this matter.
Conclusions
In England, losses suffered because of erroneous tax advice can
now only be resolved by litigation between those adversely affected
and their trustees and/or tax advisors. There is scope for offshore
jurisdictions to take a different path and it will be interesting
to see how the recent judgment is treated in light of offshore
policy considerations. It will also be interesting to see whether
the recent judgment inspires HMRC to intervene for the first time
in a Hastings-Bass application in Jersey, given that it has
recently done so in Guernsey.