Update: personal tax and trusts

Following the Hastings-Bass case in 1975 there have been several recent cases on the question of whether a voluntary transaction can be set aside on the basis that the parties made a mistake. Three cases have been decided this year, so it is an opportune time to recap on the 'rule in Hastings-Bass' and its current application.

There is much case law on the effect of a mistake by a party to a commercial transaction. Where both parties agree that there has been a mistake and that the transaction did not reflect their intention, they can apply to court for rectification, but, where only one party wishes to set aside a transaction, an application to court for restitution on the basis of unjust enrichment is required. In the case of gifts and voluntary transactions by trustees, the ability to set aside transactions as a result of unjust enrichment has existed for much longer.

In Ogilvie v Littleboy [1897] 13 TLR 399, Lindley J held that a gift can be set aside if the donor was under some mistake of so seriousa character as to render it unjust on the part of the donee to retain the property given to him.

Gibbon v Mitchell [1990] 1 WLR 1304 appeared to change the test as to whether a voluntary transaction will be set aside for mistake. In that case, Millet J said that a transaction will be set aside if the mistake relates to 'the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it'. If this test is satisfied, it would not matter whether the mistake was a mistake of fact or a mistake of law.

Developing the rule

Re Hastings-Bass [1974] EWCA Civ 13 concerned a settlement made in 1947 which gave a life interest to A but which also gave A the power to appoint during his lifetime or by his will that one or more of his sons should receive the trust fund following A's death. A had a son in 1948. In 1958, A exercised his power of appointment to give that son the remainder interest in the trust fund, contingently on attaining the age of 25 years, absolutely.

In the meantime, A's sister had made a settlement in 1957 under which she gave A's son a life interest. Subsequently, to reduce the estate duty liability on A's death, the trustees of the 1947 settlement made an advancement under section 32(1) of the Trustee Act 1925 of a fund worth £50,000 to the trustees of the 1957 settlement. However, as A's son was not a 'life in being' when the 1947 settlement was created, the trusts relating to the advanced fund, by reference to the 1957 settlement, were void for perpetuity (except for the life interest given to A's son).

When A died in 1964, the Inland Revenue claimed that the advancement was completely ineffective and therefore the advanced fund remained subject to the 1947 settlement.

The court decided that where, by the terms of a trust (for example under section 32 of the 1925 Act in Hastings-Bass), a trustee is given a discretion as to some matter, under which he acts in good faith, the court would not interfere with his action, notwithstanding that it does not have the full effect which he intends, unless:

• what he had achieved was unauthorised by the power conferred on him;
• it was clear that he would not have acted as he did;
• had he not taken into account considerations which he should not have taken into account; or
• had he not failed to take into account considerations which he ought to have taken into account.

You may need to read (b) a couple of times before you can understand the double negative.

In the Hastings-Bass case, the court refused to interfere with the advancement by the trustees because the purpose behind the advancement was a saving of estate duty and an acceleration of the interest of A's son. Although the trustees did not consider (as they should have done) that the remainder trusts would fail for perpetuity, even if they had considered that issue, it was reasonable to deduce that the trustees would have considered the advancement to be for the benefit of A's son.

In Mettoy Pension Trustees Ltd v Evans & Others [1990] 1 WLR 1587, the rule in Hastings-Bass was amended into a simpler, but more restricted, principle. Here, Warner J said: 'Where a trustee acts under a discretion given to him under the terms of the trust, the court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account.'

In June 2006, HM Revenue & Customs issued revenue interpretation RI 278, which set out its comments on the rule in Hastings-Bass and which referred to case law which had arisen since the decision in Hastings-Bass. HMRC had previously been reluctant to be joined in as a party in such cases as these but said that it would give active consideration to participating in future case where large amounts of tax are at stake.

Bass '“ a fresh angle

There have been three cases heard this year on the question of whether a voluntary transaction entered into by a person acting in a fiduciary capacity (as trustee or as receiver) can be set aside.

In Pitt v Holt [2010] EWHC 45, the settlor was unable to manage his own affairs as a result of an accident and his wife was appointed his receiver under the Mental Health Act 1983. The compensation payment which was made to the settlor comprised a lump sum and an index-linked annuity.

On the advice of financial advisers, the receiver applied to the Court of Protection for the annuity to be assigned into a discretionary settlement under which the beneficiaries would be the settlor, his wife and their children.

The receiver was not advised of the tax implications of creating the settlement, but, as the settlement did not qualify as a disabled person's trust, an inheritance tax liability arose on the creation of the settlement and ten yearly charges and exit charges arose.

The receiver and another of the trustees applied to court to set aside the settlement, following the rule in Hastings-Bass. HMRC, which was one of the defendants to the claim, contended that the principle in Hastings-Bass only applied to dispositions by trustees and, in any event, the principle should only apply where a trustee takes action which does not achieve the intended purpose.

It was held that the rule in Hastings-Bass could apply to a disposition made by a receiver under the Mental Health Act 1983. Although a receiver acted on behalf of a patient, the receiver was still acting in a fiduciary capacity and was not acting on the instructions of the patient.

It was also held that the rule in Hastings-Bass would not only apply where the immediate purpose of a transaction had not been achieved. Inheritance tax was a consideration which ought to have been taken into account but was not considered at all by the receiver. Had the receiver considered that there would be a liability to inheritance tax, she would not have created the settlement and made the assignment on behalf of the patient. The settlement and assignment were, therefore, set aside.

In this case, the tests for setting aside a transaction which were formulated in Gibbon and in Ogilvie were considered and it was decided that the appropriate test was that laid down in Gibbon, but that the two tests did not conflict with each other.

All a-Futter

In Futter v Futter [2010] EWHC 449 Ch, the trustees of an offshore settlement exercised their power of advancement to give the settlor an absolute beneficial interest in the trust fund. The trustees were also trustees of a separate offshore settlement and, similarly, they exercised a power of advancement in favour of the settlor's children. The intention was to crystallise the stockpiled gains within the settlements, because the settlor and his children had significant capital losses which they believed could be offset against the stockpiled gains. However, the stockpiled gains could not be offset in the way intended.

The trustees sought a declaration, relying on the rule in Hastings-Bass, that the advancements were void. HMRC was party to the case and contended that it would be unreasonable to extend the Hastings-Bass principle to cover this situation.

It was held that the rule in Hastings-Bass should apply. There was also consideration about whether the rule in Hastings-Bass would mean that any action would be void or voidable. It was decided that the transaction would be void.

Bad deeds

In Jiggens v Low [2010] EWHC 1566 Ch, heard on 29 June 2010, the issues, like Futter and the other relevant cases that went before, related to the exercise by the trustees of a discretionary power. The settlement was an accumulation and maintenance settlement, which contained the usual provisions as to 'primary beneficiaries' and contained an overriding power of appointment in favour of a wider class of beneficiaries (who included the primary beneficiaries). The trust assets included land which potentially had significant development value and therefore the trustees decided to appoint that the income from the land should be paid in equal shares to the primary beneficiaries. The deed of appointment was expressed to be irrevocable.

The following year, the trustees were given advice that the deed of appointment of an irrevocable right to the income from the trust fund was equivalent to an absolute appointment of capital and therefore gave rise to a deemed disposal by the trustees. I have not seen a full transcript of the case, but I assume that there was a possibility that the appointment created a new settlement, rather than creating a sub-fund of the existing settlement (as set out in the cases of Bond v Pickford and Roome v Edwards).

Even if the appointment did not comprise a deemed disposal by the trustees, it would have prevented any claim for holdover relief from CGT on a subsequent transfer of capital to the primary beneficiaries. The court held that the Hastings-Bass principle should apply and that the deed of appointment was, therefore, void from the outset.

The rule in Hastings-Bass will be of great comfort to professional advisers who have overlooked certain tax implications of proposed transactions by trustees and others acting in a fiduciary capacity. However, the costs of application to court, which will apparently be defended in many cases by HMRC will be an expensive process which will no doubt need to be funded by the careless lawyer or accountant.