The testator died in March 2015. By his last will of 14 March 2015 (the will) the testator gave the sum of £4.2m (the legacy fund) to his trustees to be held upon trust to pay the income to his widow for life, subject to an overriding power of appointment in clause 4 of the will for the benefit of a class of discretionary beneficiaries including the testator’s sister. The testator left a letter of wishes for his trustees which indicated how he wanted his estate to be shared between the various members of the discretionary class. By clause 19 of the will the statutory power of advancement in s32 of the Trustee Act 1925 was extended so as to be exercisable over the whole of a beneficiary’s presumptive share in capital.
On 17 and 18 November 2015 the executors, at the request of the trustees, made a number of distributions totalling just under £190,000 to the testator’s sister and to his three children. These payments were made informally and not by deed.
On 30 November 2015, and without the executors having first assented any estate assets to the trustees, the trustees executed a deed of appointment appointing the legacy fund onto wide discretionary trusts, thereby terminating the widow’s interest in possession. This gave rise to an immediate charge to inheritance tax of at least £737,000. The trustees’ evidence was that they were not aware of these inheritance tax consequences and that, had they been aware, they would not have made the appointment. The trustees had been advised by solicitors that the termination of the widow’s interest in possession would be treated as a potentially exempt transfer by her for inheritance tax purposes.
Subsequently, further distributions of about £590,000 were made by the trustees to the children and grandchildren of the testator and his widow. These appointments were made at the informal request of the trustees and were not made by deed. There was no evidence as to which power the trustees intended to use.
The trustees applied to the court seeking declarations as to the validity of (1) the payments made prior to the 2015 deed of appointment; (2) the 2015 deed of appointment itself; and (3) the payments made subsequent to the 2015 deed of appointment. In the alternative, they applied to set aside the 2015 deed of appointment on the grounds of mistake. The trustees indicated that should the payments be declared to be void or otherwise set aside, they would be minded to make fresh and valid appointments so that the beneficiaries who had already received funds were not thereby disadvantaged.
- (1) The payments made prior to 15 November 2015 were not validly made. There were two possible powers under which the payments could have been validly made. They could have been made either under the power of appointment in clause 4 of the will or under the extended statutory power of advancement under s32 of the Trustee Act 1925.
- (2) There was no effective exercise of the extended statutory power of advancement in respect of the payments made prior to the deed of appointment. Such payments would have required the life tenant’s consent in writing. At no stage was the widow life tenant asked to provide her specific consent to the payment or given any advice that she could object to the payment being made. Moreover, the testator’s sister had no presumptive interest under the trusts of the will and, as such, the payment to her could only have been made by the trustees under clause 4 of the will.
- (3) Further, it was clear that the payments made before the deed of appointment were not made by virtue of an effective exercise of the power of appointment in clause 4 of the will. That power was only exercisable by deed. There was a limited equitable jurisdiction to remedy a defective exercise of a power where, for example, an appointment purporting to be by way of deed has been imperfectly or defectively executed by the omission of a required signature. The court may in those circumstances intervene for the benefit of persons for whom the appointor is under a natural or moral obligation to provide, such as a wife or child (English v Keats ). However, there was no power to intervene where the failure was to execute a deed at all. Nor, in any event, in the instant case, was there a moral obligation on the trustees to provide for any of the persons to whom payments had been made.
- (4) The deed of appointment of 30 November 2015 was validly made by the trustees notwithstanding that the trust assets had not at the time been formally assented to the trustees by the executors. There had, in any event, been an informal assent to the trustees by the executors of the funds necessary to make the payments.
- (5) The deed of appointment was set aside on the grounds of mistake. The trustees, in making the appointment, acted in reliance upon and on the basis of advice from a solicitor that the appointment would be a potentially exempt transfer. Had the trustees appreciated that this was not the case, they would not have executed the appointment in the form that they did, but would have looked for some other mechanism under which funds could be appointed or advanced to discretionary beneficiaries without an immediate charge to inheritance tax being incurred. The identified mistake went to the heart of the disposition. The trustees were clearly looking for a mechanism which would bring the widow’s interest in possession to an end in a tax-efficient manner. They only made the appointment in the form they did because they had been told and advised that the appointment would be a potentially exempt transfer and that they would thereby avoid an immediate charge to inheritance tax. The mistake was clearly fundamental for the trustees’ decision to make an appointment in the form that they did. Moreover, the tax which was now potentially payable was very large. The effect of the substantial tax bill was to significantly disadvantage members of the class of beneficiaries by reducing the size of the legacy fund.
- (6) While the trustees could not bind themselves to the future exercise of their powers, nonetheless they had given certain assurances as to how they were minded to exercise those powers in the future, and there was no dissent on behalf of the beneficiaries and certainly no active opposition to rescission being granted, even from those who had received sums from the trustees which, if rescission were granted, would fall to be recouped by the trustees. The mistake was of so serious character as to render it unjust on the part of the beneficiaries who had received payments to resist rescission. Indeed, none of them had sought to do so. This was not a case where there had been an element of artificial tax avoidance so as to require the court to withhold relief on the grounds of public policy. The appointment was essentially a straightforward trust transaction. The grant of relief would have very real consequences, as it would change the trust on which the balance of the fund was held and would have genuine tax consequences as well.
- (7) The payments made after the 2015 deed of appointment must be presumed to have been validly made under the power that was available to the trustees under clause 5.2 of the deed of appointment, under which the trustees had power to pay or apply capital for the benefit of discretionary beneficiaries without the need for any deed.