Guernsey: Guernsey Gives Important Guidance On The Approach To Trust Mistake Cases Based On Popular Tax Avoidance Schemes

In the matter of the BiGDUG Limited Remuneration Trust - Royal Court of Guernsey
Last Updated: 6 February 2015
Article by Appleby  

INTRODUCTION

On 15 January 2015 the Royal Court of Guernsey handed down a decision in the above mentioned case concerning an application made by the Settlor of a trust to set aside a disposition of assets into that trust. The Court decided the application under the Law of England and Wales, in particular following the Supreme Court decision in Pitt v Holt [2013] UKSC 26. One of the interesting aspects of this decision is the Royal Court, for the first time, appears to have considered the extent to which it ought to consider refusing to grant such an order on public policy grounds in circumstances where there is an aggressive tax avoidance scheme, which have had much publicity in recent times as being socially undesirable. This consideration arises out of an obiter comment made by Lord Walker in Pitt v Holt that there may be circumstances where setting aside a transaction on the basis of mistake may be refused on public policy grounds.

FACTS

The facts of the case are that the settlor applicant was one of the shareholders of a young but successful business and had seen his own personal wealth increase considerably over recent years. Considerations were being given to the sale of the company and as part of those considerations it had been suggested to the applicant that he may wish to consider putting his shares into a structure which would provide him with various tax benefits. As a result of advice received from a number of professionals relating to such schemes the shareholder decided to transfer a significant portion of his shareholding into what was called a remuneration trust. At the time this took place discussions for the sale of the company were well advanced, but ultimately these failed. Thus the company was never sold. The Applicant became aware in due course that the benefits the remuneration trust was supposed to have for him and his family may not have been correct. He investigated the matter more closely and established that the advice he received was indeed wrong and he was not able to benefit from the trust in the manner that he had anticipated. On this basis the shareholder made an application to the Royal Court in Guernsey that the transaction where he transferred his shares into the remuneration trust be set aside on the basis of mistake; notably on the basis that the taxation benefit he anticipated he was going to receive by transferring his shares into the trust were, in law, not available to him.

APPLICABLE LAW

The reason the Guernsey Royal Court decided this matter under the Law of England and Wales was because the Trust itself was established under the Law of England and Wales and the property concerning and the property which was the subject matter of the application were shares in an English company. In such circumstances the applicable law was that of England and Wales following Dervan and MD Events Ltd v Concept Fiduciaries Limited (unreported, 30 November 2012). The Royal Court of Guernsey had jurisdiction to determine the matter as the trustee of the trust was a Guernsey Trustee and the provisions of the Trusts (Guernsey) Law, 2007 provide the Royal Court with jurisdiction to determine such matters where that is the case.

The leading decision under the Law of England and Wales is that of the Supreme Court in Pitt v Holt (as mentioned above). The test, very broadly, is to first establish whether there has been a genuine mistake (as opposed to mere ignorance or inadvertence). If this is the case then the Court must be further satisfied that it would be unconscionable to leave the mistake or disposition uncorrected i.e. that it is sufficiently serious that the Court ought to exercise it discretion to set aside the transaction. In addition the Court considered whether, as a matter of public policy, it would be appropriate to refuse the application on the basis that "tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures" per Lord Walker at paragraph 135 of Pitt v Holt.

DECISION

The Jurats of the Royal Court found unanimously that the applicant had received poor advice when deciding whether to transfer his shares into the trust and that as a result this transfer was of such nature as to constitute a positive mistake. On this basis the Court was able to proceed to consider whether it ought to exercise its discretion to set aside the transfer. The Jurats also found that because the applicant had transferred the majority of his shares in the company (representing the majority of his wealth) into the trust this was sufficiently serious to warrant the granting of the application in these circumstances. It was of interest that the Royal Court drew a distinction between instances where an applicant had transferred their entire shareholding to a trust (such as in a previous decision with similar circumstances heard by the Royal Court) and instances where only part of a shareholding was transferred into a trust. The Court found that:

"the position of someone divesting themselves of almost the entirety of their wealth is so momentous that it follows almost automatically that it will be treated as particularly grave. The position of someone who divests themselves of only part of their wealth calls for closer scrutiny as to the reasons and careful consideration of the cause or link between the mistake and the action."

The Court finally considered whether there was a public policy reason of the type referred to by Lord Walker in Pitt v Holt which may justify the refusal of setting aside the transaction where all other requirements had been made out. In this respect the reasoning adopted by the Royal Court is particularly interesting, where it said:

"the Jurats do not regard the fact that the Applicant was participating in a scheme to avoid payments of taxes in the United Kingdom as any reason to refuse to grant the relief if it would otherwise be given. They recognised that a jurisdiction is entitled to tax those who are obliged to pay its taxes and to deal with its tax payers as it sees fit. The same, of course, applies in Guernsey. There is no suggestion that the transaction suffers by being tainted with any illegality; indeed, it was, it seems, a perfectly legitimate arrangement for the applicant to carry out".

Thus, it appears clear that when seeking to set aside a transaction on the basis of mistake in Guernsey where the underlying reason that the transfer took place was to engage in legitimate tax planning methods the Royal Court is unlikely to find that this would be a public policy reason justifying the refusal of the relief. This is a point which will be particularly important to lawyers and other advisors advising on the possibility of such applications succeeding. This also appears to be of relevance given that this particular application and the application which was made and granted in Dervan and MD Events Limited v Concept Fiduciaries Limited (unreported, 11 February 2013) were schemes set up on an almost identical framework (albeit with slightly different facts) and both have now been granted by the Royal Court in Guernsey. It is understood that there may well be further similar schemes which have been set up and which, following these Guernsey decisions, may also be sought to be set aside on a similar basis.

CONCLUSION

Whilst, in terms of the development of the law relating to setting aside transactions on the basis of mistake this decision is in itself relatively unremarkable, there are two particular points which can be taken from this decision which are likely to be of interest and benefit to anyone considering or advising on a similar set of circumstances:

It appears unlikely that the Royal Court will view such schemes as problematic from a public policy perspective when considering whether or not to refuse or grant the relief being sought. The approach to be adopted by the Court in this decision was that so long as such a scheme was intending to adopt a legitimate approach to tax avoidance this would not constitute a reason for refusing the grant of the application. There is no reason to believe the Court would not continue to adopt a similar approach;

Whilst each case will always be decided on its own specific facts, both this application and the Dervan and MD

Events v Concept Fiduciaries Limited proceedings were successful with the settlement of assets into the trust being set aside on schemes of a very similar nature. As such, there may well be the likelihood of a number of future applications concerning similar schemes being commenced as it is understood that an appreciable number of similar 'remuneration trust' schemes were sold at around the same time.

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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