In recent years the courts have regularly been asked to come to the aid of trustees who discover that their actions have had undesired and unintended tax consequences. The resulting judgments were described by Longmore LJ as ”… examples of that comparatively rare instance of the law taking a seriously wrong turn…”. That “wrong turn” was considered by the Supreme Court in the jointly decided cases of (1) Futter and (2) Pitt v HMRC.
The facts
In Futter the trustees advanced trust funds to Mr Futter and his children. Solicitors had (incorrectly) advised that no capital gains tax liability would result. In Pitt the trustees’ advisers failed to consider the inheritance tax consequences of settling funds into a trust. In both cases an unexpected tax liability arose.
The trustees sought to set aside the transactions relying on what is known as the rule in Hastings Bass – namely, that in making their decisions they failed to take the correct considerations into account. In Pitt it was also argued that a mistake had been made.
For the first time in such a case, HMRC opposed the applications. If the transactions were set aside then no (or less) tax would be payable.
Tax liabilities?
The Supreme Court drew a distinction between situations where a trustee acts outside of the scope of its power and when it acts within the scope of its power but fails to give proper consideration to relevant matters.
Where a trustee exceeds its powers, the actions of the trustee will be void.
Where a trustee fails to give proper consideration to relevant matters, the rule in Hastings Bass may apply and the actions of the trustee be voidable at the discretion of the court, but only if the trustee has acted in breach of duty.
In the Pitt and Futter cases the trustees had taken advice from seemingly competent professionals which they followed. As such the trustees had not acted in breach of duty, even though the advice they were given was wrong. The transactions were not therefore, voidable.
In Pitt the Supreme Court continued to consider whether the transaction should be set aside on the grounds of mistake. It concluded that it should. A mistake of sufficient gravity was made and it would be unconscionable, unfair or unjust to leave the mistake uncorrected.
Practical implications
In light of the requirement that the trustee be in breach of duty, in many cases it will now be inappropriate for trustees to apply to the court for a transaction to be set aside on the grounds of the rule in Hastings Bass.
Applying to set a transaction aside on the grounds of mistake may be an alternative. However, the Supreme Court hinted that courts may be less inclined to grant relief in circumstances where the trust was created for the purpose of artificial tax avoidance.
Overall the outcome of the Supreme Court decision is likely to be more claims against trustees’ professional advisers, as the ability of trustees and beneficiaries to mitigate the impact of bad advice is curtailed.
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