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Putting right mistakes in trusts

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PUTTING RIGHT MISTAKES IN TRUSTS

Since the case of Hastings-Bass deceased in 1975, there has been a way of unpicking a decision made by trustees. That case related to the tax consequences of a trustees' decision and the judgment unsurprisingly was opposed by HMRC. The serious tax consequences of the decision were avoided by the judgement of the Court who set aside the trustees' decision made in the exercise of the discretionary power where ‘if they had not misunderstood the effect that their actual exercise of the discretionary power would have, they would have acted differently'.

A recent case (Pitt v Holt and HMRC 2010) applied this principle to a case involving money received as damages for injuries received in a road accident. The money was placed into a discretionary settlement which triggered an immediate liability for Inheritance Tax (IHT) and other tax consequences. Had the money been placed into a special disabled trust, there would have been no immediate charge to IHT.

The court agreed to set aside the discretionary settlement under the Hastings-Bass principle. Although this case involved the creation of a settlement, rather than a decision by trustees, the principle still applied because of the ‘fiduciary' powers that were being exercised on behalf of someone who was not able to make decisions for themselves. The arguments of HMRC that tax should not be avoided on the grounds of a mistake were not accepted in these particular circumstances.

This case also argued the merits of setting the trust aside purely on the grounds of mistake. This was not accepted - the Court said that there had not been a mistake, IHT had not been thought about at all. The Court also confirmed that if an argument for mistake is to be successful, the mistake must relate to the effect of the transaction concerned and not just the tax consequences of it. It was the tax consequences in this case which gave rise to the case and so this argument failed.

Placing money into trust is a technical area and even to a practitioner can present a challenge to understand the tax consequences. Here, the selection of the correct type of trust would have ensured that the correct level of tax was paid at the correct time, for the benefit of the person who had been injured. The right result was eventually reached, but better to have had the correct legal advice at the outset!

Clarion's Private Client team specialise in trusts of this type - if we can help please call us.

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