In its latest consideration of an application to rectify a mistake made in relation to a Jersey discretionary trust, the Royal Court declined to use the "innovative powers" afforded to it under Article 47E of the Trusts (Jersey) Law 1984 (as amended) (the Trusts Law) so as to take positive steps to give effect to past intention of the economic settlor.
In the Matter of the B Trust  JRC035, concerned a representation brought by the economic settlor of a Jersey law trust (the Trust), seeking relief in relation to mistakes that he had made in establishing the Trust as a result of his misunderstanding as to:-
- The true nature and effect of establishing a Jersey law trust; and
- The UK inheritance tax (IHT) treatment of the Trust.
The Representor submitted that but for these two categories of mistake, he would not have settled assets into the Trust, nor would he have continued to make dispositions into the Trust. The Court accepted the Representor's evidence and set aside the transfers of assets, but would not make positive orders beyond that.
Background to the Trust
The Trust was established in March 1998 on the advice of the original trustee, Lincoln Trust Company (Jersey) Limited (Lincoln), who advised that an offshore discretionary trust was the "only vehicle" by which he could enjoy the benefit of controlling his assets (by way of a Letter of Wishes), with the ownership resting elsewhere. On Lincoln's advice, the beneficiaries of the Trust were referred to only in the most generic of terms and there was no original settlor identified in the Instrument of Trust. Lincoln also provided the Representor with tax and emigration advice, which he relied on in establishing the Trust and making distributions into the same.
In May 2017, the Representor was advised that, as he had not obtained a domicile of choice outside of the UK at the time that monies were settled onto Trust, the Trust was liable to both UK IHT ten year charge and exit charges. Accordingly, in June 2018, the Representor applied to the Royal Court of Jersey, seeking orders that:-
- the transfers into the Trust were voidable on grounds of mistake and of no effect from the times that they were made, pursuant to Article 47E of the Trusts Law;
- in voiding the transactions, the Trust property should be returned to his wife, pursuant to Article 47I of the Trusts Law, or alternatively, to him; and
- in addition, or alternatively, that the Trust is invalid on the basis that it was established by mistake, pursuant to Article 11 of the Trusts Law.
The Royal Court ordered that the Respondent Trustee, Helm Trust Company Limited and Her Majesty's Revenue and Customs (HMRC) be served with the application. The matter came before the Court in March 2019. HMRC did not participate in the proceedings nor did they provide any comment on the same.
The Decision of the Court
The Trust was established by way of a declaration by Lincoln in respect of a nominal sum. The Court declined to proceed under the basis of Article 11 as it could not be satisfied that there was a mistake on the part of the provider of the initial $100 trust fund; although there was clear evidence that the Representor was the economic settlor of the Trust, the Instrument of Trust did not identify a settlor and there was no evidence to suggest where the initial trust fund came from. However, the Representor's status as economic settlor of the Trust did give him standing to bring an application under Article 47E of the Trusts Law. The Court therefore had to ask itself whether he had made mistakes in relation to the transfer or other disposition of property into the Trust and would not have done so but for those mistakes and if so, whether those mistakes were so serious so as to render it just for the Court to make a declaration and set them aside.
Mistakes as to the tax consequences
The Representor submitted that, as an oil and gas businessman, he was not sophisticated in the world of finance. He relied on very poor advice from Lincoln and was never told to obtain his own, independent tax advice. The tax issue found by the Representor related to his UK domicile. His failure to obtain a domicile of choice outside of the UK when he made the gifts into the Trust, resulted in the Trust being regarded as relevant property and subject to both the ten year charge and exit charges. Furthermore, the Trust was subject to a reservation which would be deemed to form part of the Representor's estate on death - based on the value of the Trust at the time of the application, the Respondent trustee estimated that IHT charges would be in the region of £530,000.
The Court was concerned at the length of time that it had taken the Representor to bring proceedings seeking relief, being more than a year after the tax issue was identified, but concluded that this delay did not preclude relief being granted.
Relief and the use of the Innovative Powers
The Court having decided that the Representor had made a serious mistake, then had to decide whether or not the mistake was so serious as to render it just to grant relief. Despite the Representor's contentions to the contrary, the Court held that his business experience in the oil industry proved that he was not an unsophisticated or naïve man. In the Court's view, the Representor accepted Lincoln's advice because it was what he wanted to hear. However, it accepted that he probably did not understand the question of domicile and the resulting legal and taxation issues. In the Court's own words, the decision of whether or not to grant relief was "a matter of fine margins"; however, it concluded that it would be just for the Court to make a declaration in this case. Accordingly, the Court made a declaration under Article 47E that the dispositions into the Trust were voidable on the grounds of mistake at the dates that each respective transfer was made.
It was submitted, on behalf of the Representor, that the Court should go further than merely voiding the transfers and declaring them to be of no effect, and should actually give effect to the intentions of the Representor when making the various transfers into the Trust twenty years prior. The Court was told that merely voiding the transfers so that the assets fell back to the Representor's estate would not be tax efficient, as he had intended. The Representor's Advocate sought a declaration that the transfers were voidable and should take effect as gifts to the Representor's wife, as such a gift would come closest to achieving his donative intent. Further, it was argued that the innovative powers contained in Article 47E, as described in the Crociani case, apply which enable the Court to direct the repayment of monies to the Representor's wife. The Court stated that it would not be drawn into such schemes. The Court noted that the potential tax implications of such a redirection were of a different character to an order merely returning a gift, and that it was not for the Court to take positive steps so as to improve the taxation outcome for the Representor as though that was the objective itself - whilst it may have been the objective of the Representor, it was not the objective of the Royal Court.
In the Matter of the B Trust confirms the willingness of the Court to assist in cases where there has been a genuine mistake of a serious character, and provide relief where it is just to do so. The Court will look at matters in the round, taking into account matters such as delay and the business experience of the Representor and also the nature of and approach taken to the advice received at the time by the applicant. Whenever a serious mistake is comes to light, it is incumbent upon parties (in particular the Representor) to address matters expeditiously. However, the Court will not grant relief, the effect of which is to re-write the nature of the gift or disposition.