The Guernsey Court has recently considered an application to set
aside two dispositions on the grounds of mistake, rendering it
necessary to give consideration to how serious a mistake should be
to render it unjust for the recipient of property to be allowed to
retain such property.
The applicant was previously the beneficial owner of a
pharmaceutical company and wanted to sell her shareholding in the
company for her own personal benefit. The applicant was interested
in investment strategies and, therefore, consulted a wide range of
investment advisers who advised her to establish a trust
The first disposition was done at an early stage in the process
of establishing the structure. For tax purposes it was necessary
for the company to transfer out £500,000. The applicant's
advisers suggested that the applicant transfer this sum into a
trust, from which the applicant could benefit by taking loans,
which would result in tax savings for the applicant. The money was
transferred into the client account of the proposed trustees,
pending the establishment of the trust.
Following this, the trust was established and the applicant
transferred 100,000 of her ordinary shares in her company to the
trust. Unfortunately, the applicant was poorly advised and was not
given a copy of the trust instrument to review prior to signing. As
such, despite the applicant wishing to establish a trust for her
benefit, a remuneration trust was set up to benefit the employees
of the company and the applicant was named as an excluded person of
this trust. This was established despite it being made clear by the
applicant that the company had an employee benefit trust already in
The applicant, therefore, applied to the Royal Court of Guernsey
for an order that the disposition of the sum of £500,000 and
the transfer of the shares be set aside on the grounds of
The trust was governed by the law of England and Wales and, as
such, the Court applied English law when considering the
application. The Court confirmed the general rule, as set out in
Ogilvie v Littleboy and as re-affirmed in Pitt v Holt, that a gift
should only be set aside if the donor can show that they were under
a mistake of so serious a character as to render it unjust for the
donee to retain the property given to them.
The Royal Court decided that the transfer of the shareholding
was a sufficiently serious mistake and ordered that the shares be
transferred back to the applicant. In deciding this, the court
noted that the likelihood of someone transferring the vast bulk of
their wealth in circumstances where they are unable to benefit is
remote. The Court was satisfied that this was such a momentous
decision for the applicant to have taken and the difference between
the effect of the transaction as the applicant understood it and
the actual effect was so great that the transfer should be set
However, the Court did not feel there had been a sufficient
mistake by the applicant when transferring the sum of
£500,000 to the trust. The Court noted it was always the
intention of the applicant to set up a trust and transfer this sum
into the trust. In turn, the applicant intended to benefit by way
of loans from the trust. This was emphasised by the applicant being
invoiced in discussions for a potential property purchase through
the trust structure, suggesting that she understood how her
contribution to the trust would work and how she would, in turn,
Ultimately, this decision has reinforced the high level of
gravity that must be shown in order to establish a mistaken gift.
The donor must not understand the effect of the transaction itself;
a mistake as to the consequences or advantages to be gained from
the transaction is insufficient. The case also highlights the
importance of clients choosing advisers correctly and ensuring, at
all times, that they communicate and document their intentions
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Many people are baffled by trusts, the purpose of which they don't fully comprehend. Some even regard them with suspicion, as tools of of opaque tax evasion strategies of a type favoured by wealthy individuals.
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