In IFM Corporate Trustees Limited v Helliwell and Mountain the Royal Court itself raised the potential tax consequences and intentions behind a trust, and whether they should affect how the Court decides applications made to it in respect of trusts.
As far as the parties were concerned, the main issue was to succeed in their application to rectify the trust, i.e. to correct and rewrite its drafting to bring it back into line with the original intention behind it. The Court's power to rectify a trust in this way is a rare but established one. It is available where there has been a genuine mistake in the drafting of the terms of a trust, for example (as in IFM), omitting an intended beneficiary. Rectification is not available to change a trust from the form in which it was originally settled into something else that the parties have decided would have been better, e.g. to alter it to meet a change in tax legislation. It is not the Court altering the underlying trust, but correcting the documents recording its terms and existence.
Previously, the Royal Court has decided that to order rectification:
- it must be satisfied that as a result of a genuine mistake the trust instrument does not carry out the true intentions of the parties, and the settlor in particular,
- there must be full and frank disclosure, And
- there should be no other practical remedy.
If the Court is satisfied as to these three points, it does not follow that it will order rectification, but the Court then decides in its discretion whether it should order rectification.
The trust in IFM was an employee benefit scheme, the employer being the settlor. Separately to the trust, that employer paid its employees wages and also made discretionary loans to them. It then settled its right to repayment into the trust, together with cash contributions to the trust fund. The repayment rights were held on the trusts of a sub-fund of the trust (the "Initial Sub-Fund") of which Ms Helliwell and Ms Mountain were two of the beneficiaries. The cash contributions were held on the trusts of other sub-funds ("Subsequent Sub-Funds") of which there were a large and variable number. The repayment rights and the cash contributions would then be transposed by the trustee so that the cash contributions were held by the Initial Sub-Fund and the repayment rights were held by the Subsequent Sub-Funds. In this way, on the repayment of a loan, the trustee could potentially benefit employees who were beneficiaries of Subsequent Sub-Funds.
The beneficial class of the overall trust scheme extended to any specified employee and specified classes of relatives. Unfortunately, the trust instrument omitted certain relatives and their spouses (defined by reference to an employee's grandparents) from this class, which included Ms Mountain.
The trustee, settlor and other beneficiaries of the trust supported the application, and on the evidence before it the Court accepted the omission had been a genuine mistake not truly reflecting the intentions of the settlor, and that there was no practical remedy other than rectification.
So far, so orthodox, and IFM does not alter the law as stated above regarding rectification applications. However, the case increases in significance because of what it did not decide, but clearly indicated it might have to in future. When considering whether the applicants had given full and frank disclosure, the Court noted the paperwork originally submitted to it made no mention at all of the UK tax position – realistically, the common driver for settling property into an offshore trust. Subsequently, the Court was satisfied that the rectification did not alter the tax position, nor that the trust overall was intended as an aggressive tax avoidance scheme. What is interesting is whether, had the trust appeared such a scheme, it would have altered the Court's decision.
Because the trust was not such a scheme, the Court did not have to decide. But it made comments that such a consideration might be relevant in a future case. It expressly recognised strong ethical arguments exist why tax payers should make a fair and appropriate contribution towards the outgoings of the state they live in which are made for the benefit of the community as a whole.
But equally, the Court recognised the strict legal position that any citizen is entitled to retain his or her property unless it is taxable by appropriate legislation. It further noted that to organise one's affairs so as to minimise tax according to the rules which the taxing state has itself set down can be seen as a fundamental freedom, and it could be said that to decide what is or is not acceptable by reference to a moral view those rules do not expressly provide would be extremely uncertain.
The Court has reflected on this previously, in a case involving an application to set aside a mistaken settlement into a trust. There, the issue was whether the Court should exercise its discretion to relieve the settlor from a mistake when effecting the settlement. Again, the Court there noted that there were two sides to the argument, but seemed ambivalent as to whether tax avoidance was a "social evil" (as it had been described by the UK Supreme Court), because the perspective is different from a foreign jurisdiction and tax system, and the state can be said to have passed all the laws necessary to tax everything it intended to tax. As in IFM, however, the Court did not have to decide which side of these arguments it preferred.
Nevertheless, the Court's comments in IFM indicate that the increasing global focus on tax payment, avoidance and evasion mean that the day the Jersey Court has to decide and adopt its stance may be approaching. Potentially, any application to the Court involving its discretion (and most applications in respect of trusts do involve the Court's discretion) may require the tax consequences and intentions of the scheme to be aired and subjected to a wider debate whether the Court should go along with them.
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.