FACTS
The trustees of a Jersey discretionary trust (the "Trust") had proposed to make an investment and sought UK tax advice about how to do so without generating a UK Capital Gains tax charge. The UK accountants advised that the investment should be made through the Trust rather than through a private investment company (the "Company") which was owned by the trust and two other connected family trusts as had initially been proposed. As such, the Company provided loans to the trustees of the Trust to enable the investment.
Unfortunately, as a result of changes to UK tax law after tax advice had been obtained, the manner in which the investments had been made triggered a UK tax liability. The trustee thus applied to have the decision set aside under the Hastings-Bass principle.
HELD
Application of the Hastings-Bass principle
Once again the Court confirmed that the Hastings-Bass principle is as much a principle of Jersey law as it is of English law, as was made clear in In Green GLG Trust [2002] JLR 571 ("Green GLG").
In considering the application of Hastings-Bass, the Court asked itself the three questions laid down in Mettoy Pensions Trustees Limited v Evans [1991] WLR 158:
- What were the trustees under a duty to
consider? In Sieff v Fox [2005] EWHC 1312 ("Sieff v
Fox"), it was held that tax consequences were in general
relevant. Here, the purpose of investing in the manner adopted by
the trustees was to defer UK tax, and as such it must have been
relevant for the trustees to consider the UK tax consequences of
their decision.
- Did they fail to consider it? The trustee was
unaware of and so failed to consider the true UK tax position in
relation to the investments.
- If so what would they have done if they had considered
it? The trustee would have proceeded differently had it
appreciated the true UK tax position. There was no need for the
Court to consider the issue of whether 'would' or
'might' is the correct test for the application of
Hastings-Bass as in this case the higher threshold was met. The
Court again avoided the question of whether the decision should be
regarded as void ab initio (from the beginning) or voidable by
setting aside the decision and declaring it to be of no
effect.
Requirement for Fault
The Court declined to find fault on the part of the trustee and as such it was relevant to consider whether fault is a requisite part of an application under Hastings-Bass. The Court accepted the criticisms of the English case of Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409 and, declining to follow that case, held that there is no requirement under Jersey law to find fault or breach of duty on the part of the trustee or its agents in order for the Hastings-Bass principle to apply.
Contrary Arguments
HMRC, in its Tax Bulletin 83 of June 2006, had argued for a distinction to be made between cases where the trustee fails to take into account fiscal considerations at all and cases where they take steps to obtain advice and that advice turns out to be wrong. In the latter case, they argued, Hastings-Bass should not apply. The Court refused to make such a distinction on the basis that it was presumably based upon the policy that in such circumstances a trustee should suffer the tax consequences and pursue its remedies against the tax advisors - the same policy that the Court had rejected in Green GLG.
COMMENT
The protection of beneficiaries is a central theme in the judgment, and it was noted in the judgment that Lloyd LJ in Sieff v Fox saw the principle of Hastings-Bass as providing protection for beneficiaries from trustees' mistakes, rather than merely breaches of duty - a sentiment that was clearly shared by the Court. In declining to require fault on the part of the trustee or its agents, the Court has again refused to limit the application of the Hastings-Bass principle, ensuring that it remains a valuable remedy for trustees and beneficiaries alike.
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