Setting aside appointments on the grounds of mistake – another brick in the wall
The case concerned variations to a trust created in 1992 in respect of a life insurance policy held by Hilary Marsden (née Burton, the settlor).
The trust created interests for each of: (i) the settlor’s two children (Kate and Adam), (ii) her former partner (Amanda), and (iii) her former partner’s daughter (Lillie). These interests were “qualifying interests in possession”, and so taxable as if the underlying property formed part of the relevant beneficiary’s estate.
The trustees eventually decided that Amanda should no longer benefit under the trust and, whilst Lillie would continue to benefit during her lifetime, her family should no longer benefit on Lillie’s death.
To give effect to the above, the trustees entered into a deed of appointment in 2013. They entered into a further deed of appointment in 2014 to distribute a capital sum to Lillie from her fund.
Legal effect of the deeds
The trustees intended to maintain the interests of Kate, Adam and Lillie as they were. However, the 2013 deed of appointment ended up revoking their qualifying interests in possession and resettling the respective shares onto new trusts (which would not be treated as “qualifying interests in possession”, thereby attracting different tax treatment). Not only did this mean that their respective interests would now give rise to inheritance tax charges every 10 years (at up to 6%) and upon distributions from the trust, it also triggered an immediate inheritance tax charge of £365,000 (with additional interest due on the unpaid tax of over £68,000).
The trustees argued that they did not intend to alter the interests of Kate, Adam and Lillie and that the deeds of appointment were entered into without a proper consideration of the relevant issues. They contended that the deeds should therefore be set aside.
Rescission on the ground of mistake
In line with previous judgments dealing with rescission of a voluntary disposition on the ground of mistake (including the cases of Payne and another v Tyler and another and Hartogs v Sequent (Schweiz) AG and others, which both involved the setting aside of trust transactions where mistakes had been made as to their tax consequences), Master Clark relied on the principles set out in the Supreme Court decision in Pitt v Holt to make a decision in this case:
- there must be a distinct mistake, which is to be distinguished from mere ignorance or inadvertence or "misprediction";
- the mistake must be sufficiently grave so as to render it unjust on the part of the donee to retain the property they receive;
- there must be a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction; and
- the Court must consider the existence of a distinct mistake, its degree of centrality to the transaction in question and the seriousness of its consequences and make a judgment as to whether it would be unjust to leave the mistake uncorrected.
Master Clark decided to set aside both deeds of appointment. The trustees were found to have made an operative mistake in relation to the substance and effect of the 2013 deed of appointment.
This was clearly the case on the basis that, alongside what was in fact a revocation and resettlement, the trustees had purported to make a capital distribution to Kate despite the resettled trusts only giving Kate an entitlement to the income from her share. A similar finding applied in relation to the 2014 deed of appointment, pursuant to which the trustees purported to advance capital to Lillie from her share, despite the resettled trust only entitling her to the income from her share.
Master Clark also found that the trustees were mistaken in their belief when entering into the 2013 deed of appointment that this was a “vanilla” transaction which carried no risk of adverse tax consequences. In his opinion, such a mistake was sufficiently serious to justify setting the appointments aside.
It is important to note that trustees (and individuals) should not expect to be able to rely on the doctrine of mistake to provide them with a "get-out-of-jail-free-card" to alleviate any unforeseen tax charges. In particular, in Pitt v Holt, Lord Walker suggested that relief might well be refused where “artificial tax avoidance” is involved and there seemed a clear aim on the part of the court to curtail the scope of the Hastings-Bass rule (which was noted as having been seen as a “soft option” versus bringing a mistake claim). However, the decision in Hopes v Burton is an encouraging confirmation of the court’s continuing willingness to set aside voluntary transactions on the ground of mistake so long as the conditions set out in Pitt v Holt are satisfied, and where the tax consequences of the transactions are (mistakenly) thought to be “vanilla”, rather than involving more complex tax planning strategies.