7 October 2020

Undoing The Past – Recent Isle Of Man Trust Cases

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The Isle of Man Court has confirmed the ability to undo past actions that have resulted in adverse tax consequences on the basis of mistake.
Isle of Man Tax
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The Isle of Man Court has confirmed the ability to undo past actions that have resulted in adverse tax consequences on the basis of mistake.

The first case Oliver v Fedelta CHP2019/163 considered the Court's jurisdiction to set aside transfers into trust on the grounds of equitable mistake.

The Court set aside transfers into a trust made on the basis of an incorrect belief grounded on inheritance tax advice received at the time the transfers were made.

Deemster Corlett indicated that Isle of Man law should follow the ruling of the UK Supreme Court in Pitt v Holt, Futter v Futter [2013] UKSC 26; [2013] 2 AC 108.

In Pitt it was held that there must be a mistake of sufficient gravity which is related to either the legal character or nature of the transaction, or to some other matter of fact or law which is basic to the transaction. Relevant considerations are the existence of a distinct mistake, its degree of centrality to the transaction in question and the seriousness of its consequences, and to judge whether it would be unconscionable or unjust to leave the mistake uncorrected.

Previously the test was whether the transfer would not have been made "but for" the mistake.

Oliver did not consider the Hastings-Bass principle as there was no question as to the manner of the trustee's decision making process.

The second case Masheder & Masheder v Masheder CHP 2020/066 involved an application for rectification of a trust deed, drafted in a way that did not represent the settlor's intentions.

The intention was that the settlor would make a potentially exempt transfer for inheritance tax purposes at the time the trust was created and he had no intention of benefiting from the trust.

The claimants, the current trustees, sought rectification of the trust deed on the grounds of equitable mistake so as to:

  1. Insert a clause excluding the defendant from attaining any benefit from the trust; and
  2. Provide for default trusts where the defendant's three children would be named as the beneficiaries.

The Court ordered that the trust be rectified for the following reasons:

  1. There was clear evidence of the intention of the settlor at the time the trust was established and that he had no intention of benefitting from the trust in any way.
  2. The existing trust deed was materially defective in light of the intention of the settlor.
  3. The clear evidence was a contemporaneous report made by the settlor which set out his reasons for the trust and the intentions for setting it up.

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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