The progress through the courts of Pitt v HMRC and Futter v HMRC has been followed closely by trustees and those advising them. The decision of the Supreme Court, handed down on 9 May 2013 gives us the final chapter.
The two cases, both contested by HMRC, related to the scope of the so-called "rule in Hastings Bass" (which concerns trustees who have made a decision without having properly considered relevant matters). Pitt also considered the law of equity surrounding the court's jurisdiction to set aside a voluntary disposition on the ground of mistake, in both cases, the trustees of the respective trusts sought to have decisions set aside which had given rise to unintended tax consequences. HMRC argued that the decisions should stand.
In 2011 the Court of Appeal's decision in Pitt v Holt and Futter v Futter limited the scope of the rule in Hastings Bass. Lloyd LJ gave the lead judgment and held that where trustees have relied on professional advice (even negligent advice) they are unlikely to have been acting in breach of trust and therefore their decision cannot be said to be void or voidable. The effect of this was that, unless made in breach of trust, such a decision would stand regardless of any unpalatable or unforeseen tax consequences. The Court of Appeal's decision effectively put a stop to the relatively common practice of trustees who had made a mistake as to the tax consequences of their actions, bringing successful applications to the lower courts to have their decisions set aside as voidable under the rule in Hastings Bass.
Following the Court of Appeal's decision, both of the unsuccessful parties appealed to the Supreme Court. Their appeals were contested by HMRC. The matter was heard in March 2013. The Supreme Court, with a lead judgment from Lord Walker, dismissed both appeals insofar as they related to the rule in Hastings Bass. It allowed the appeal in Pitt on the issue of mistake.
The effect of the decision regarding the rule in Hastings Bass is that, in order to rely on the rule, an applicant will need to show a breach of fiduciary duty or breach of trust on the part of the fiduciary or trustee. The Supreme Court confirmed the judgment given by the Court of Appeal, that there is unlikely to be a breach of fiduciary duty where that fiduciary has obtained and followed professional advice. The effect of this ruling will be to limit the use of the rule in Hastings Bass in the English courts and particularly to deter trustees from making applications under this rule. The judgment was also critical of trustees in part, suggesting that the rule had been too heavily relied on and trustees too willing to confess their failings to the extent that applications under the rule were generally regarded as uncontroversial.
Lord Walker's judgment also provided detailed guidance on the court's jurisdiction to set aside a voluntary disposition on the grounds of mistake. Broadly it is not the nature of the mistake that will be considered (for example any distinction between a mistake as to effect or as to consequence) but the seriousness of the mistake. Although it is too early to tell at present, with time we may see more trustees' applications being brought in mistake as an alternative or an addition to reliance on the rule in Hastings Bass.
In more detail
Although the cases were joined on appeal, their facts are quite different. The differences are relevant here as ultimately one applicant (Mrs Pitt) succeeded in having the trust in question set aside, whereas that other did not.
Pitt
Here the claim was brought by the personal representatives of Derek Pitt. Mr Pitt had incurred serious injuries in a road accident in 1990 and lost mental capacity in that accident. He died in 2007. The facts are unusual for Hastings Bass claims in that they related to a decision made by Mrs Pitt in her capacity as her husband's receiver, rather than as trustee. Mr Pitt, through his receiver had brought a claim in damages for his injuries and this claim was compromised by a structured settlement. Mrs Pitt had sought advice in a written report from solicitors as to the form of that settlement. This advised that damages should be paid into a discretionary settlement and this was done with the approval of the Court of Protection. The report however, failed to address the issue of inheritance tax. The effect of this omission was that although the trust could easily have been set up as a special kind of "disabled" trust with advantageous inheritance tax treatment, this was not done. There was an immediate charge to IHT and the possibility of a further charge on the tenth anniversary of the trust.
Futter
The facts of Futter were more typical of the kinds of cases brought to the courts to have a decision set aside under the rule in Hastings Bass. The case related to a private family trust and, again, to inadvertent tax consequences. Mark Futter created two settlements in 1985. Initially both settlements had non-resident trustees, but in 2004, two UK residents were appointed as trustees. One of these trustees was a partner in the firm of solicitors acting for the trustees and gave tax advice to the settlements. Acting on his advice, in 2008 the trustees exercised a power of enlargement, distributing the entire trust capital of one settlement to Mr Futter; and a power of advancement, distributing monies from the other settlement to Mr Futter's children. In doing so the trustees (or in effect the professional advice they obtained) had not considered recent legislation with the result that Mr Futter and his children ended up with unexpected capital gains tax liabilities.
Hastings Bass decision
These two cases were the first applications under the rule in Hastings Bass to be contested by HMRC for many years. Lord Walker's judgment indicated that HMRC had previously been invited to join similar cases and had declined. Here they opposed both appeals on the grounds of public policy.
In his judgment dismissing both appeals, Lord Walker confirmed his general agreement with Lloyd LJ's judgment in the Court of Appeal insofar as it related to Hastings Bass. For a full analysis of this judgment, please click here. This had held that the most recent statements of the rule in Hastings Bass were wider than the true principle expressed in the original decision. Lord Walker agreed with Lloyd LJ that a distinction should be drawn between an error made by trustees who fail to give proper consideration to relevant matters but where the decision is within the scope of a trustee's power ("inadequate deliberation") and an error made by trustees which goes beyond the scope of their power, "excessive execution." He also flagged a further category of decision, where a fraudulent appointment has been made for an improper purpose. The rule in Hastings Bass applies to the first of these categories.
He also endorsed the key aspect of Lloyd LJ's judgment: that in order to be able to set aside the transaction under the rule in Hastings Bass, the inadequacy of the decision must be sufficiently serious as to amount to a breach of duty (for example a breach of fiduciary duty or a breach of trust). He stated:
"It would set the bar too high (or too low depending upon the spectator's point of view) to apply the Hastings-Bass rule whenever trustees fall short of the highest standards of mature deliberation and judgment."
Similarly Lord Walker found that it would not be enough for a court to look at a transaction and decide that it would have acted in a different way. Save in exceptional circumstances, a breach is necessary. This is because without a breach the court generally does not have the jurisdiction to step in and intervene.
Lord Walker also agreed that when considering inadequate deliberation and the matters which a trustee ought to take into account, such considerations must include the fiscal consequences of a transaction. This should not, however, be to the exclusion of other considerations. He described tax considerations as a "constant preoccupation" of trustees. The judgment also looked at the role of professional advice obtained by the trustees. Broadly, to have obtained incorrect advice is "no excuse" as regards the applicability of the rule in Hastings Bass. Solicitors and other professionals may act as agents of the trustees in some circumstances but they do not act as agents in the exercise of the trustees' fiduciary discretion. Such decisions can only be exercised by the trustees or fiduciaries. Lord Walker also summarily rejected a submission that the trustees' duty to take into account relevant considerations should be interpreted as a duty only to follow correct advice. There is no requirement for trustees to be infallible.
This decision both gives and takes away from trustees. Where advice is wrong and has been followed the trustees are left in the positive position that there is no strict liability against them, no automatic breach. This protects them in terms of actions for breach of fiduciary duty but does mean that they will not then be able to apply under the rule in Hastings Bass to correct the error. Recourse would have to be found in a negligence claim against the advisors, although the Court acknowledged that there would be no certainty of success in such an action. Where there has been a breach of duty, the Court will still have a discretion as to whether to grant relief.
Lord Walker also commented that it had become a striking feature of the development of the rule in Hastings Bass that trustees appeared to be happy to seek the assistance of the court and to rely and assert their own failings (or those of their advisors) in doing so, rather than the beneficiaries leading such an application. He made it clear that he agreed with Lloyd LJ that in general "it would be inappropriate for trustees to take the initiative in commencing proceedings... they should not regard them as uncontroversial proceedings in which they can confidently expect to recover their own costs out of the trust fund."
Decision in mistake
In allowing Mrs Pitt's appeal on this ground, the Court provided a detailed judgment on the applicability of the jurisdiction for setting aside a voluntary decision on the grounds of mistake. In essence to be able to set aside such a decision, the applicant must be able to show that there has been a mistake of sufficient gravity. Here the Court took the view that there was sufficient gravity and the test was satisfied.
The law in this area previously had drawn a distinction between a mistake as to effect (which could be set aside on the grounds of mistake) and mistakes as to consequences (which could not). This distinction will no longer apply and the focus must be on the gravity of a mistake rather than any classification as to the type of mistake. Equity should be fluid and should not be bound by rigid classifications as to type. In some situations errors can be just as serious in their consequences as in effect.
Lord Walker's judgment also stated that when considering whether a mistake is of sufficient gravity this should be assessed by a close examination of all the facts - regardless of whether or not these facts have been tested by cross-examination. The relevant facts will include the circumstances of the mistake and its consequences for any person who made the vitiated disposition. It does not matter if the mistake is due to carelessness on the part of the person making the voluntary disposition, unless that person deliberately ran the risk (or must be taken to have run the risk) of being wrong. The mistake does not have to be known by the person or persons taking a benefit under the disposition and can be unilateral.
HMRC argued that a mistake which relates exclusively to tax cannot be relieved by the Court in these circumstances. They argued that mistakes leading to tax consequences should be treated as being in a different category. The Court did not accept this argument. It held that consequences, including situations where there are only tax consequences, can be relevant to the gravity of a decision. In Pitt, the loss of the inheritance tax advantage was a serious one for Mrs Pitt as her husband's receiver, as well as for her as his wife, carer and ultimately a beneficiary of his estate.
When looking at the facts of Pitt, the Court found that the transaction was not artificial or an abuse of a statutory relief - section 89 had been designed to grant relief in relation to exactly this sort of trust. There would be nothing artificial or abusive in Mrs Pitt establishing the trust so as to obtain protection under section 8 Inheritance Tax Act 1984.
The Court did not have to decide on the issue of mistake in the Futter case, as Mr Futter had not originally put his case in terms of mistake and was not given permission to do so. When considering whether a transaction should be deemed artificial or an abuse, Lord Walker provided some commentary as to whether the position would have been the same if mistake had been pleaded in Futter or to arrangements more extreme than that of Futter in terms of their artificiality. Lord Walker questioned whether the court should assist people who wished to extricate themselves from a tax avoidance scheme gone wrong using the jurisdiction to set aside on the grounds of mistake. He also commented that a court might think it right to refuse relief either on the grounds of public policy or because claimants acting on expert advice must be deemed to have accepted the risk that a proposed tax avoidance scheme might prove ineffective. He suggested that there is an increasingly strong and general recognition that tax avoidance is a "social evil" and this may influence a court's decision as to whether equity should be engaged to set aside a decision on the grounds of mistake.
HMRC also argued that relief should not be granted because it serves no other practical purpose than saving inheritance tax and "equity does not act in vain." Again this was not accepted. The court held that there were other contestable issues between HMRC and persons who had received distributions from the SNT other than as purchasers for value without notice.
An argument was also made that a deed which transfers property for no consideration can be set aside only for a mistake of a fundamental nature such as would render a contract void. This was not accepted. It was held it was not acceptable to treat a voluntary disposition in the same way as a commercial bargain just because it has been made in the form of a deed.
How will it affect trustees?
The previous understanding of the rule in Hastings Bass has been limited and the need for a breach of trust by the trustees as a condition of the court's intervention has been confirmed. Any applications made under the rule in Hastings Bass are more likely to be made by beneficiaries in the future and only where a breach of trust can be found. Trustees will be reluctant to bring such applications as to do so would be to necessarily admit their own breach of trust. Such trustees are unlikely to recover their costs.
The decision may also affect the way in which trustees choose to take professional advice. Ultimately trustees cannot simply point to errors in that advice to absolve themselves and this may make them more careful in the advisors they instruct. Similarly, solicitors and other advisors may be more alert to these issues as they may be facing a negligence action rather than the comfort offered by Hastings Bass.
Applications in the future may also look to characterise decisions within the equitable remit of mistake rather than under the rule in Hastings Bass.
It is also worth bearing in mind that Pitt and Futter are decisions of the English court and may not necessarily be mirrored by offshore jurisdictions.
Lord Walker did comment, however, that Pitt and Futter are fact sensitive. In the future there may be "cases in which small variations in the facts lead to surprisingly different outcomes." So the Supreme Court decision may not necessarily be the end to this story - we may see a sequel in the courts in the future.
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.
