A & ors v D & ors [2017] EWHC 2222 (Ch)

WTLR Issue: Autumn 2017 #169

A

B

C

V

D (by a litigation friend)

E (by a litigation friend)

F (by a litigation friend)

G (as representative of the class of unborn beneficiaries)

Analysis

A & B were the current trustees of a settlement known as the Children’s Trust dated 21 March 2000. They were, with C, the current trustees of a settlement known as the M Trust dated 7 December 2004 (together the ‘Settlements’). A was the settlor of the settlements. D, E & F were his three minor children. G was joined in as a person appointed to represent a class of unborn beneficiaries. The settlements were drafted to qualify as accumulation and maintenance trusts within the requirements of Section 71 of the Inheritance Tax Act 1984 (‘1984 Act’). Both made provision for a class of principal beneficiaries – that included any children of the settlor who were born before the trust closed – to acquire an interest in possession in a share of the trust fund at the age of 25. The budget announcement in March 2006 heralded the termination of the benign tax regime that hitherto had applied to accumulation and maintenance trusts with effect from 6 April 2008. If no change were made to those trusts prior to that date, then the settled property would become relevant property and become subject to inheritance tax charges on each tenth anniversary and to exit charges on beneficiaries becoming absolutely entitled. The Finance Act 2006 (‘FA 2006’) provided a measure of relief if accumulation and maintenance trusts were either converted into trusts that required one or more beneficiaries to become absolutely entitled to the trust property on or before their 18th birthday or converted into age 18-25 trusts in accordance with the requirements of Section 71D of the 1984 Act as inserted by FA 2006. If those requirements were met, the settled property would not be relevant property after 5 April 2008 and a special exit rate would be applicable when Section 71D of the 1984 Act ceased to apply. However, these provisions referred to beneficiaries who were alive at the time when the settled property ceased to be subject to Section 71 of the 1984 Act; in other words, age 18-25 trusts could not be created for a class of beneficiaries that included persons who might be born after that date. Those provisions required the beneficiaries to become absolutely entitled no later than on attaining the age of 25 although they left open the possibility that the trusts could include powers of advancement the exercise of which could be used to postpone the vesting of an interest. The trustees of the settlement, after much deliberation, executed deeds of appointment on 10 March 2008 (‘deeds of appointment’) by which they revocably appointed that the trust funds should from that date be held upon trust for such of the class of beneficiaries as should attain the age of 25. The difficulty was that the appointments were made revocable, instead of irrevocable, and so it meant that if the trustees chose to exercise that power, the trust property would be held on the trusts that applied under the original settlements. Even if they did not exercise that power, there was a real likelihood that HMRC would not accept that the trusts as amended by the exercise of the trustees’ powers qualified as age 18-25 trusts. At the material time, the settlements had a combined value of approximately £18.5m. The trustees sought relief from the court to the effect that the deeds of appointment could be construed so as to enable the word ‘revocably’ to be read as ‘irrevocably’; in the alternative, that they could obtain the same result by rectification.

Held (allowing the claim for rectification):

Equity had the power to rectify a written instrument so that it accorded with the true intention of its maker but, being a discretionary remedy, rectification had to be treated with caution. Accordingly, the standard of evidence required that the claimant’s case be established by convincing proof as it contradicted the apparent intention recorded in the document. There had to be a flaw in that document such that it did not give effect to the parties’ intention as distinct from the parties being merely mistaken as to the consequences of what they had intended, the specific intention of the parties had to be shown with a degree of precision and there must be an issue capable of being contested between the parties notwithstanding their consent. In the case of voluntary transactions, such as the deeds of appointment in this case, the relevant test was whether the documents gave effect to the subjective intention of the maker; there was no legal requirement for there to be any outward expression or objective communication of the settlor’s intentions. The trustees were seeking to establish from the evidence the following four elements:

  1. (i) The trust created by the appointments would satisfy the requirements of Section 71D of the 1984 Act and that they had sufficient understanding of what those requirements were;
  2. (ii) A’s children would become entitled to their share of the trust capital if they attained the age of 25;
  3. (iii) Any deferral of a child’s entitlement to capital should be made pursuant to a power of advancement or appointment exercised for the benefit of that child and not by revoking the earlier appointment; and
  4. (iv) The capital and income should be appointed for the benefit of D, E & F in fixed equal shares and not appointed for a class of beneficiaries that had not closed.

It was clear from the evidence that the trustees sought to take advantage of Section 71D of the 1984 Act by converting the accumulation and maintenance trusts into age 18-25 trusts as they had been sent a briefing note based on guidance prepared by the Society of Trust and Estate Practitioners and the Chartered Institute of Taxation that had been agreed with HMRC. It was also clear from the minutes of trustees’ meetings that they were considering the position of A’s living children; not the wider class that would have included unborn children. However, it was unfortunate that the language used to refer to the ability to defer the entitlement to capital, using the power of advancement, employed the word ‘revoke’. The evidence established that the trustees were not intending to reserve to themselves the power to revoke the new trusts; only to reserve the ability to defer the entitlement to capital using the power of advancement. Consequently, during the drafting stage, the word ‘irrevocable’ was changed to ‘revocable’ and this remained in the final versions of the deeds of appointment. It followed that, in relation to both settlements, the elements of the claim to rectification were made out. Although fiscal considerations lay behind the claim, its focus was on the failure of the lawyers acting for the trustees to implement their instructions satisfactorily. It followed that it was unnecessary to consider the case on construction.

Judgment Chief Master Marsh: [1] By a claim form issued on the 21 April 2017, the claimants seek relief in connection with two settlements dated respectively 21st of March 2000 and 7 December 2004. On 19 April 2017 Deputy Master Pickering made an order directing that privacy restrictions should be put in place with immediate …
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Counsel Details

(Giles Goodfellow QC
Pump Court Tax Chambers, 16 Bedford Row, London WC1R 4EF, tel 020 7414 8080, e-mail clerks@pumptax.com) instructed by Clyde & Co LLP ( St Botolph Building, 138 Houndsditch, London, EC3A 7AR, tel 020 7876 5000) for the claimants. Edward Waldegrave (Pump Court Tax Chambers, 16 Bedford Row, London WC1R 4EF, tel 020 7414 8080, e-mail clerks@pumptax.com) instructed by Fladgate LLP (16 Great Queen St, London WC2B 5DG, tel 020 3036 7000, e-mail fladgate@fladgate.com) for the first defendants. Oliver Conolly (Pump Court Tax Chambers, 16 Bedford Row, London WC1R 4EF, tel 020 7414 8080, e-mail clerks@pumptax.com) instructed by Fladgate LLP (16 Great Queen St, London WC2B 5DG, tel 020 3036 7000, e-mail fladgate@fladgate.com) for the second defendant.

Cases Referenced

Legislation Referenced

  • Finance Act 2006
  • Inheritance Tax Act 1984, ss 64 & 65, 71 & 71D