Analysis
In March 2007 Safe Investments Management UK (Safe), an unlimited company, transferred its shares in Gooch Investment (Gooch) to Equity Trust (BVI) Ltd, a trust company (2007 transfer), to be held on the terms of a settlement for the benefit of qualifying employees of Safe (First Staff Remuneration Trust). This transfer followed the transfer of interests in UK business assets (the estate) from the first and second appellants (Mr and Mrs Bhaur) to Safe and from Safe to its subsidiary Gooch. All these transfers took place as part of a tax scheme (scheme) promoted by Mr O’Toole, who operated a tax advisory business. The intention of the scheme was that the transfer of the estate to Safe would be tax neutral, and that the transfer of the shares in Gooch into the First Staff Remuneration Trust would be treated for tax purposes as a transfer to an employee benefit trust. The purpose of the scheme was to allow Mr and Mrs Bhaur to pass the estate to their children on their death, while avoiding Inheritance Tax. HMRC challenged the scheme and in 2010 served a statutory notice.
In 2010 and 2011 the First Staff Remuneration Trust was replaced by a second trust on the same terms (Second Staff Remuneration Trust). That change involved the estate being transferred by Gooch to the second respondent, whose shares were held by the first respondent (Equity First Nevis) as trustee of the Second Staff Remuneration Trust. Equity First Nevis was connected with Mr O’Toole. A Swiss company also connected with Mr O’Toole was subsequently appointed as the protector of the Second Staff Remuneration Trust. Further changes to the structure led to the estate being held by IVM PPC on the terms of a sub-trust of the Second Staff Remuneration Trust.
In 2016 Equity First Nevis began to operate the Second Staff Remuneration Trust according to its terms but in doing so acted contrary to the wishes of the Bhaur family. In May 2018 Equity Trust Nevis appointed the entire trust fund of the Second Staff Remuneration Trust to the fourth respondent (NSPCC), which had been added as a beneficiary of the Second Staff Remuneration Trust by the protector. The Bhaur family claimed that Equity First Nevis’ actions and those of Mr O’Toole and the protector relating to the transfer of the estate to the NSPCC were dishonest breaches of trust.
In October 2018 the appellants issued a claim by which (among other things) they sought to have the 2007 transfer set aside on grounds of equitable mistake.
By his judgment, given following a six-day trial ([2021] EWHC 2581 (Ch)), Marcus Smith J refused to set aside the 2007 transfer because he held that Safe (acting by Mr and Mrs Bhaur) had made no relevant mistake and had known that the scheme amounted to tax evasion, in that Mr O’Toole had dishonestly intended to mislead HMRC by falsely presenting the First Staff Remuneration Trust as a genuine employee benefit trust, when there was no intention to benefit any qualifying employees of Safe. The appellants appealed.
Held, dismissing the appeal:
The appeal should be dismissed whether or not the judge below had been right to characterise the 2007 transfer as a misprediction of the tax effects of the scheme and not a mistake as to those effects or as to whether the 2007 transfer was reversible at will (paras [82]-[83]). Mr Bhaur had made a deliberate decision to implement the scheme, knowing that there was a risk both that it might fail to achieve the desired tax benefits, and that he and his family might, unless they took certain steps to address the position, end up worse off than before (para [84]). The dishonesty of an adviser could not be relied upon for invoking the court’s equitable jurisdiction in mistake any more than the negligence of an adviser (para [90]). An ultimately mistaken belief that the Bhaur family would retain de facto control over the estate following the 2007 transfer would not have been causative (paras [96]-[97]). Even assuming that Mr Bhaur was operating under a causative mistake, that the Bhaur family were innocent of any involvement in Mr O’Toole’s dishonesty and that the result, if the 2007 transfer stood, may have been that the appellants were left with large tax liabilities and no assets with which to satisfy them, the judge below had been right to deny them relief. This was because, first, in implementing the scheme, Mr and Mrs Bhaur knew there was a risk and decided to take it (para [101]). Secondly, the scheme was an entirely artificial tax avoidance scheme and this was a very weighty factor against the grant of relief (para [105]). Pitt v Holt [2013] applied.
JUDGMENT LORD JUSTICE SNOWDEN: The appeal [1] This appeal concerns the court’s equitable jurisdiction to set aside a voluntary disposition of assets on the ground of mistake in the context of a failed inheritance tax avoidance scheme. [2] It is an appeal against a decision of Marcus Smith J (the ‘Judge’) given after a six-day …Continue reading "Bhaur & ors v Equity First Trustees (Nevis) Ltd & ors [2023] WTLR 851"