Analysis
The first appeal concerned two settlements, made with non-resident trustees, by Mr Futter. Considerable ‘stockpiled’ gains were rolled up while the trusts were non-resident and, in exercise of the powers conferred by the trusts, new resident trustees were appointed and capital was distributed to Mr Futter and his children in the mistaken belief that the ‘stockpiled’ gains, which would be attributed to them, would be absorbed by allowable losses that had been realised, so that no liability to capital gains tax would arise. In advising as to the effect of s87 of the Taxation and Chargeable Gains Act 1992, the trustees’ solicitors had overlooked the effect of s2(4) (as amended by para 2 of Schedule 21 to the Finance Act 1998) and this resulted in a substantial liability to capital gains tax. The trustees applied to have a deed of enlargement and deeds of advancement declared void under the rule in Re Hastings-Bass deceased [1975] Ch 25 (though not, alternatively, on the ground of mistake). Norris J, following the then leading judgment of Lloyd LJ in Sieff v Fox [2005] WTLR 891, held that the deeds were void, not voidable. The second appeal concerned a special needs trust (SNT), established by the authority of the Court Protection, for personal injury damages awarded to Mr Pitt. Financial advisors had advised, with reference to income tax and capital gains tax, that the damages should be settled in a discretionary settlement but made no reference to inheritance tax with the result that, not being compliant with s89 of the Inheritance Tax Act 1984 (ie the SNT contained no restriction that at least half of the settled property applied during his lifetime was applied for the benefit of Mr Pitt), there was an immediate liability to inheritance tax with the future prospect of a further tax charge on the tenth anniversary. Proceedings were initially taken against the financial advisors claiming damages for professional negligence but, after further advice, the personal representatives of Mr Pitt applied to have the SNT set aside either under the rule in Hastings-Bass or on the ground of mistake. The deputy judge, while not satisfied that there was any real mistake (as opposed to a failure to think about the tax consequences), likewise followed the then leading authority of Lloyd LJ in Sieff and set aside the SNT on the basis that a receiver, as a fiduciary, was essentially in the same position as a trustee for the purposes of the rule. HMRC, which had been joined as parties to both sets of the proceedings, appealed and the Court of Appeal (Lloyd LJ with the concurrence of Longmore and Mummery LJJ) allowed both appeals. After a thorough review of the authorities, Lloyd LJ delivered a comprehensive and clarifying judgment in which he changed the contrary view, which he previously expressed in Sieff, and endorsed the first instance decision of Lightman J in Abacus Trust Co (Isle of Man) v Barr [2003] WTLR 149 to the effect that, for the rule in Hastings-Bass to apply, the vitiating error of the trustees must be inadequate deliberation on matters relevant to their decision (rather than mistake) that was sufficiently serious as to amount to a breach of duty. The principled and correct approach to the cases on the rule was that the trustees’ decision may be voidable, not void, if it could be shown to be a breach of their fiduciary duty and therefore capable of being set aside at the instance of a beneficiary, subject to equitable defences and to the discretion of the court. The trustees’ duty to take relevant matters, including fiscal consequences, into account was such a fiduciary duty. However, if the trustees sought advice from apparently competent advisers as to the implications, and they then followed that advice then, in the absence of any other basis for challenge, they would not be in breach of their fiduciary duty for failure to take relevant matters into account simply because it turned out that the advice given to them was materially wrong. In such a case, the trustees’ decision, made in reliance on that advice, should not be regarded as being vitiated by the error and therefore voidable. However, for the exercise of the equitable jurisdiction to set aside a voluntary disposition Lloyd, LJ concluded that there must have been a mistake of a relevant type (ie as to the legal effect of the disposition or as to an existing fact which was basic to the transaction) that was sufficiently serious to satisfy the test in Ogilvie v Littleboy (1897) 13 TLR 399 but considered the tax liability, even though immediate and backed by a statutory charge, as no more than a consequence, rather than an effect, of the transaction. The appellants appealed.
Held (dismissing both appeals as to rule in Hastings-Bass but allowing the second appeal on the ground of mistake):
- (1) As Lloyd LJ had clarified, there was an important distinction between an error by trustees that went beyond the scope of a power (excessive execution) and an error by trustees in failing to give proper consideration to matters relevant to their decision which was within the scope of a power (inadequate deliberation). Cases of excessive execution included, for example errors by trustees due to a misunderstanding as to the application of the rule against perpetuities on the exercise of a power of advancement, whereby the advance would be void if wholly outside the scope of the power as in Re Abrahams’ Will Trusts [1969] 1 Ch 463 or valid if within its scope so far as not tainted by perpetuity as in Re Hastings-Bass. The Court of Appeal in that case had already decided that the advancement must stand unless it could not reasonably be regarded as beneficial to the advance. Buckley LJ’s statement of principle, that the court should not interfere with the trustee’s action unless it was clear that he would not have acted as he did (a) had he not taken into account considerations which he should not have taken into account or (b) had he not failed to take into account considerations that he ought not to have taken into account, added nothing. In fact, what has been described as the rule in Hastings-Bass was not its ratio decidendi but a misnomer based on that statement of principle, as recast in positive terms, by Warner J in Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 where what was at issue was not whether the exercise of a discretion was within the scope of the trustees’ powers but the propriety of the exercise of those powers. Subsequent cases extended the application of the rule to family trusts and it was only the decision of Lightman J in Barr, to the effect that a breach of duty on the part of the trustee was essential to the application of the rule, which made a correct statement of the law. If, in exercising a fiduciary power, trustees have been given, and have acted on, advice from apparently competent advisers, the only direct remedy available to the trustees, or to a disadvantaged beneficiary, must be on the ground of mistake (an indirect remedy may be available in the form of a claim against those advisers for damages for breach of professional duties of care). Lightman J was right to decide that when the vitiating error was inadequate deliberation by trustees on matters relevant to their decision, the inadequacy must be sufficiently serious as to amount to a breach of duty and, in those cases where the rule applied, it made the trustees’ decision voidable, not void. On the facts of the first appeal, the trustees had not failed in their duty to take relevant considerations (ie fiscal consequences such as capital gains tax) into account. The problem was that the tax advice that they received and acted on was wrong because an amendment to the relevant statutory provisions had been overlooked. Similarly, on the facts of the second appeal there was no breach of fiduciary duty; the advice that had been taken and followed was unsound because it did not deal with the inheritance tax consequences. Accordingly, both appeals would be dismissed so far as they turned on the rule in Hastings-Bass.
- (2) The equitable jurisdiction to set aside voluntary dispositions on the ground of mistake, which was much wider in its application than the so called rule in Hastings-Bass, was based on good authority, including a decision by the Court of Appeal (affirmed by the House of Lords) in Ogilvie that a donor could only recover property given away by showing that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain that property. For this purpose, the cases showed that mistake must be distinguished from mere forgetfulness, inadvertence or ignorance, and from ‘misprediction’. The former could, however, be causative in the sense of leading to a false belief or assumption that the law would recognise as a mistake such as, for example, in Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476. Aside from mere ignorance, the court, if justified by the facts, should not shrink from drawing an inference of conscious belief or tacit assumption, either of which may be mistaken, where there is evidence to support such an inference. Equally there were cases which showed that a voluntary transaction would be set aside on the ground of mistake if the court were satisfied that the disponor did not intend the transaction to have the effect that it did so long as the mistake, whether of law or of fact, was as to the effect, rather than the consequences, of the transaction. Millett J made this a statement of principle in Gibbon v Mitchell [1990] 1 WLR 1304, which Lloyd LJ extended in the court below, primarily to accommodate cases such as Lady Hood of Avalon, by formulating it as a requirement that, for the equitable jurisdiction to set aside a voluntary disposition for a mistake to be invoked, there must be a mistake on the part of a donor either as to the legal effect of the disposition or as to an existing fact that was basic to the transaction. However, it was questionable whether this added anything significant to the test in Ogilvie v Littleboy. The true requirement was that there had to be a causative mistake of sufficient gravity to invoke the equitable jurisdiction and, as additional guidance to the finding and evaluation of facts in any particular case, that test would normally be satisfied only when there was a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law that was basic to the transaction. In any case, there had to be an objective evaluation of injustice (unfairness or unconscionableness) because equity could only act on the conscience under the doctrine of mistake in much the same way as under the doctrine of proprietary estoppel. The submission on behalf of HMRC that a mistake that related exclusively to tax could not in any circumstances be relieved was rejected – tax considerations, though a consequence rather than an effect of a transaction, were nevertheless relevant to the gravity of the mistake, whether or not they were basic to the transaction. Consequently, and having regard to the possibility of potentially contestable issues arising, the test for setting aside a voluntary disposition on the ground of mistake was satisfied on the facts of the second appeal. Accordingly, the orders below would be discharged and the SNT set aside for mistake.
Obiter: had the first appeal been grounded, in the alternative, on mistake there would have been an issue of some importance as to whether the court should assist in extricating the claimant from a tax avoidance scheme which had gone wrong. Mr Futter’s scheme was by no means at the extreme end of artificiality, but it was hardly an exercise in good citizenship. In some cases, the court might think it right to refuse relief, either on the ground that such claimants – acting on apparently competent advice – must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused for reasons of public policy. Ever since W T Ramsay Ltd v IRC [1982] AC 300 there had been an increasingly strong and general recognition that artificial tax avoidance was a social evil that put an unfair burden on the shoulders of those who did not adopt such measures.
JUDGMENT LORD WALKER: Introduction [1] These appeals raise important and difficult issues in the field of equity and trust law. Both appeals raise issues about the so-called rule in Re Hastings-Bass deceased [1975] Ch 25. One appeal (Pitt) also raises issues as to the court’s jurisdiction to set aside a voluntary disposition on the ground …Continue reading "Futter & anr v HMRC; Pitt & anr v HMRC [2013] WTLR 977"