Bermuda: Futter v HMRC And Pitt v HMRC: An Offshore Perspective

On 9 May 2013 the Supreme Court of England and Wales handed down its judgment in the jointly heard appeals of Futter v HMRC and Pitt v HMRC [2013] UKSC 26. The judgment has provided the courts of England and Wales with certainty on the so-called "rule in Hastings-Bass" and on the setting aside of voluntary dispositions on the grounds of mistake.

The judgment does not have a direct impact upon offshore jurisdictions, but those working in the fiduciary industry will inevitably wish to take note of the Supreme Court's decision, of the potential for offshore courts to follow suit and of the possible legislative responses. This article seeks to explain the key findings of the Supreme Court and what they may mean for those working offshore.

Pitt v HMRC, Futter v HMRC and the rule in Hastings-Bass

In essence, the rule in Hastings-Bass is concerned with the unpicking of decisions made by trustees without giving proper consideration to matters which ought to have been taken into account. The leading decision until now was given in the case of Sieff v Fox [2005] 1 WLR 3811, and was thought by HMRC to be too lenient on trustees who had taken tax advice that turned out to be defective.

It is now clear that for the Hastings-Bass rule to apply under English law, trustees' inadequate deliberations must have been "sufficiently serious as to amount to a breach of fiduciary duty". Without such a breach, the Court will not be entitled to intervene. Trustees that act in reliance upon professional advice (including tax advice that ultimately proves to be incorrect) will not, without having gone beyond the scope of their powers, be deemed to have acted in breach of duty.

Whilst tax consequences are relevant considerations for trustees to take into account, the Supreme Court warned that the "greater danger is not of trustees thinking too little about tax, but of tax and tax avoidance driving out consideration of other relevant matters."

Offshore

The reformulated rule in Hastings-Bass will make it harder under English law for trustees to have decisions set aside on the basis that relevant considerations, and in particular negative tax consequences, were overlooked. In such circumstances, it is easy to foresee beneficiaries focusing sharply upon trustees and professional advisors in seeking to recover their losses. Whilst the Supreme Court's decision is likely to be persuasive in offshore jurisdictions, the courts are not bound to follow it and it is particularly apposite to note:

(i) That in Jersey consideration is actively being given to amending the Trusts (Jersey) Law 1984 so as to include a statutory version of the rule in Hastings-Bass as it existed prior to the Futter case. The intention would be to limit subsequent hostile litigation (between, inter alia, beneficiaries, trustees and expert advisors), save costs and provide certainty. It is likely, however, that even if the rule becomes part of Jersey law through statute, the decision on whether or not to grant relief under it in any particular case will be left to the Royal Court. Given the close ties between the Islands, and the need for them to remain competitive in the modern world, we would expect Guernsey and the Isle of Man to take this into account when amending their laws.

(ii) In the decision of Chief Justice Ground in the Bermuda case of GH & IJ v. KL (a section 47 application), he said that:

"While it may be that Evershed MR in the English Court of Appeal in Chapman v. Chapman [1953] 2 WLR 94 at 128 expressed a trenchant view that "it is no part of the functions of Her Majesty's courts to recast settlements from time to time merely with a view to tax avoidance," I think, with respect, that that is essentially obiter. In my judgment, if the proposal is otherwise plainly expedient, then there is no limitation in the statute which prevents its sanction simply on the grounds that it is designed in the interests of tax efficiency, and nothing to justify my importing such a restriction".

Pitt v HMRC: setting aside dispositions on the grounds of mistake

Where unforeseen consequences result from a settlor's transfer, it may be possible to have the transfer set aside on the grounds of mistake. Prior to Pitt there was, however, some inconsistency as to the circumstances that could give rise to this type of relief.

Previous case law suggested that the Court needed to distinguish between mistakes as to the "effect" and the "consequences" of a transaction before granting relief. This nuanced distinction could give rise to a relatively narrow (and not always readily identifiable) set of circumstances in which a transfer could be set aside. This approach had been rejected in the Isle of Man and in Jersey. The Supreme Court also rejected this approach in finding that the "true requirement" is for a "causative mistake of sufficient gravity [that] will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction".

Following Pitt, a mistake must be distinguished from forgetfulness, mere ignorance or 'mispredictions', but the Court will closely examine the facts, circumstances and consequences in assessing the gravity of the mistake. It should also look at matters as a whole in determining whether it is just to leave a mistake uncorrected.

Whilst relief may still be available for mistakes that relate exclusively to tax, in cases of "artificial tax avoidance the court might think it right to refuse relief".

Offshore

The Supreme Court's rejection of the effect/consequence distinction brings the English position into closer alignment with what could be termed the 'offshore' approach (most notably favoured by the courts of Jersey and the Isle of Man).

Lord Walker expressed misgivings (in the Pitt judgement) as to granting relief on the grounds of mistake where the only mistake had been as to tax consequences in the context of "artificial" tax avoidance are based on English public policy considerations. As the law currently stands in Jersey, such considerations would not concern the Royal Court. To quote from the judgement of Sir Philip Bailhache, in Re S Trust "the preference accorded to the interests of the tax authority in the UK is not one...with which we are sympathetic". The Royal Court was of the view that "Leviathan can look after itself"and that "in Jersey, it is still open to citizens so to arrange their affairs, so long as the arrangement is transparent and within the law, as to involve the lowest possible payment to the tax authority". But it is also likely that claims to set aside trustee decisions under the rule in Hastings-Bass may more often now be framed as claims to set them aside on the grounds of mistake.

The United Kingdom and Public Policy

It is clear that, in part, the decisions in these cases were based on public policy. In the modern world it would be naive to think that international financial centres can simply thumb their noses at onshore centres in their court decisions. Equally, though, is it right that their decisions should be determined by the public policies of other countries? And is the Privy Council therefore the correct final arbiter of their laws?

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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