Following its participation in the case of Pitt and Anor v
Holt and Ors  EWHC 45 (Ch), HMRC has once again
directly intervened in a Hastings Bass application in England and
had its arguments rejected at first instance. HMRC had for some
time been of the view that the current formulation of the
Hasting-Bass principle is too wide in scope. While Courts in
England, and indeed Jersey and Guernsey, have been aware of
HMRC's views for some time, it is clear that HMRC is now making
extensive efforts to limit the application of the principle.
This case is also interesting in that the Judge held that the
consequence of invoking the rule in Hastings Bass is to make the
deed or transaction void, rather than voidable. In doing so, he
provided a measure of clarification to a line of inconsistent
authority which Judges in previous decisions had not resolved.
In 1985 Mr Futter had established two life interest settlements.
By 2008, each contained "stockpiled gains" for UK capital
gains tax purposes. It was anticipated that if those
"stockpiled gains" were brought onshore after 5 April
2008 they would be taxed at an overall effective rate of 28.8% so
that the total CGT liability for winding up the settlements was
likely to be in the region of £163,000.
The trustees were advised that personal losses of Mr Futter and
his children could be used to offset the "stockpiled
gains". Accordingly, using their powers of enlargement and
advancement, the trustees terminated one settlement and paid the
entire capital of that fund to Mr Futter. The trustees also
advanced sums from the other settlement to Mr Futter's three
However, that advice was incorrect. It had not taken account of
section 2(4) of the Taxation of Capital Gains Act 1992, which
specifically says that, in relation to such attributed gains,
allowable losses cannot be set off.
The trustees applied Court to under the rule in Hastings Bass,
stating that they had failed to consider the true fiscal
consequences, and had they done so they would not have acted as
they did because minimising the CGT payable on the extraction of
funds from the settlements was a priority, and the perceived tax
consequences determined the form of the advancements.
HMRC submitted that the rule in Hastings Bass had been carried
to almost absurd lengths, and advanced arguments that the rule in
Hastings Bass was but one aspect of the general law of mistake, and
therefore the key question was whether the trustees understood the
effect of the transaction. The Judge rejected this, holding that
the Rule in Hastings Bass had its origin in the law of powers and
drew no distinction between "effect" and
"consequences", and that therefore a material difference
between the intended and actual fiscal consequences of an act may
bring the rule into play.
HMRC also submitted that the trustees had taken the relevant
considerations into account, and that the fact that the advice was
wrong should not mean that the rule in Hastings Bass is engaged.
However, the Judge held that the rule existed to ensure that
beneficiaries do not suffer by invalid exercise of a power, and
thus the failure to take into account a particular factor and its
true effect on the exercise of that power was the relevant
The Judge also held that the consequence of invoking the rule in
Hastings Bass is to make the deed or transaction void, although he
stated that the rigours of this analysis may be mitigated in
particular cases where a change of position defence is available,
or by application of equitable considerations.
This case is important insofar as HMRC's arguments have been
clearly rejected by the English courts of first instance. HMRC is
appealing the decisions in both Futter and Pitt v
Holt. In any event, the rule in Hastings Bass will finally be
subjected to appellate level scrutiny, and a definitive ruling is
therefore likely It also remains to be seen what effect
developments in England will have on HMRC's attempts at
intervention in the Channel Islands. In particular, HMRC was given
leave to intervene in the Guernsey Court of Appeal in the
Limited, which decision may also persuade HMRC to
reattempt such an intervention in Jersey (having previously been
denied leave at first instance by the Royal Court in Re Seaton
Trustees Limited (unreported, 19 March 2009).
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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