Trusts.
[2021]JRC166
Royal Court
(Samedi)
10 June 2021
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Before :
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J. A. Clyde-Smith OBE, Commissioner, and
Jurats Blampied and Austin-Vautier
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Between
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Q
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Representor
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And
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Lutea Trustees Limited and Lutea Hong Kong
Limited
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First Respondents
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And
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Advocate Guillaume Staal, representing the
unborn beneficiaries
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Second Respondent
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And
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W (guardian ad litem for the minor
beneficiary)
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Third Respondent
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IN THE MATTER OF
THE R TRUST, THE S TRUST, THE T TRUST AND THE U TRUST
AND
IN THE MATTER OF
ARTICLES 11 AND 47E OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)
Advocate R. S. Christie for the Representor
Advocate N. M. Sanders for the First
Respondents
Advocate G. C. Staal for the unborn
beneficiaries and for the guardian ad litem of the minor beneficiary
judgment
the commissioner:
1.
The
Representor applies to set aside and declare to be of no effect and void ab
initio four trusts settled by him in February 2009. We will refer to him as “the
Settlor”.
Background
2.
The
Settlor’s domicile of origin is the U.K. He moved to work in Hong Kong in 1980,
when he was 24 years old. He met
his wife there in 1984, whose domicile of origin is also the U.K. They were married in 1987 and have three
children, all born in Hong Kong in 1990, 1992 and 1994 respectively. After seven years in Hong Kong, the
Settlor applied for, and was granted, permanent residency there. The Settlor’s position is that he
had acquired a domicile of choice in Hong Kong.
3.
In July
1996, the company the Settlor worked for in Hong Kong was acquired by a Malaysian
company and as part of the sale agreement, he was required to move to work in
Kuala Lumpur. In March 1998, the
Settlor resigned from that employment, and the family moved to the U.K. for the
purpose and duration of the children’s school and university education. The Settlor became U.K. resident for tax
purposes and in his tax returns, he maintained his domicile of choice in Hong
Kong. A home was acquired in the
U.K., but he and his wife retained their home in Hong Kong, to which they
intended to return. During this
period of U.K. residence, the Settlor’s work was very much Hong Kong
orientated. He and his wife
returned to Hong Kong in March 2019 and have resided there ever since.
4.
The
Settlor was very successful in his field.
He met Mr David Jenner of Lutea Trustees Limited (“Lutea”),
a Jersey based trust company, in 1994/1995 who provided the Settlor with tax
and legal advice. A number of
trusts were set up to protect the Settlor’s tax position. Part of that advice was to test the
Settlor’s domicile of choice in Hong Kong with HMRC by settling a
relatively small sum of money on a trust on 7th August 1995 and
reporting it to HMRC on the basis that his domicile of choice was Hong
Kong. On 6th March 1996,
HMRC wrote accepting that the Settlor was not domiciled in the U.K. but saying
that the position would be reviewed periodically.
5.
In 2006,
new non domicile rules in the U.K. were anticipated which were eventually
incorporated into the Finance Act 2008.
Mr Jenner advised that English tax counsel, Ms Emma Chamberlain, should
be retained. They advised that the
existing trusts the Settlor had established should be wound up.
6.
In 2008,
the Settlor’s wife submitted a domicile form to HMRC claiming a domicile
of choice in Hong Kong in response to a query from HMRC over her offshore bank
accounts. They responded on 1s
October 2008 in these terms:
“Thank you for your client’s completed Domicile form
(OCG4). We have reviewed the
information provided about your client’s Domicile status, and have no further
questions in respect of their offshore account(s) at present.
HMRC reserve the right to review this position in the future and may
ask your client to substantiate their claim.
Your client may become domiciled within the UK if their personal
circumstances and intentions towards remaining in the UK change. As long as they remain resident in the
UK their domicile status should be reviewed each year and HMRC should be
informed if you or your client consider they have become domiciled within the
UK and it is relevant to their tax liability.
Any foreign income that your client remits to the UK may affect
their tax liability and HMRC should be informed immediately.
Thank you for your cooperation.
Please note that nothing in this letter constitutes HMRC’s agreement
to any claim to a particular status, allowance or relief.”
7.
Having
wound up the existing trusts, the issue then arose as to whether new trusts
should be established. There are
very detailed and professional records of the extensive attendances upon Ms
Chamberlain, the notes of which were routinely copied by Mr Jenner to the
Settlor and discussed with him.
8.
As the
note of the attendance upon Ms Chamberlain on 15th October 2008
shows, it was critical in deciding whether new trusts should be established
that the Settlor had retained his domicile of choice in Hong Kong. If his U.K. domicile had revived, there
would be a substantial Inheritance Tax (“IHT”) charge of 20% based
on the value of the assets transferred into trust.
9.
We are not
concerned here with an analysis of that advice, but what the Settlor says he understood
that advice to be and its effect upon the decisions he took. The final position was that Mr Jenner
and Ms Chamberlain advised he should proceed with new trusts because they were
satisfied that he had maintained his non-U.K. domiciled status, essentially
because:
(i)
The
family’s residence in the U.K. was for the purpose of the
children’s education. It was
the Settlor’s declared intention (and that of his wife) to return to Hong
Kong where they maintained a home once the children’s education had been
completed.
(ii) HMRC had confirmed his change of domicile from
the U.K. to Hong Kong in 1996. The
burden would now be on HMRC to prove that this domicile of choice had been
lost.
(iii) HMRC had confirmed the non-domiciled status of
the Settlor’s wife in October 2008.
Mr Jenner and Ms Chamberlain viewed the Settlor’s position as
being stronger than that of his wife.
10. Assuming his non domiciled status, there were a
number of benefits to establishing new trusts, summarised in the attendance
note of 22nd October 2008 as follows:
(i)
They would
provide long term IHT protection, so that if the Settlor lost his foreign
domicile or became domiciled in the U.K. the IHT protection would continue to
exist.
(ii) There would be no Capital Gains Tax on
disposals of U.K. assets held in trust.
(iii) Capital Gains realised by the trustees would
not be taxed on the Settlor whilst he was not domiciled in the U.K. unless he
received capital distributions which were then remitted to the U.K..
(iv) Such trusts would generally provide for easier
succession, because there would be no need to have wills in various
jurisdictions.
11. In February 2009, the Settlor proceeded to
establish four Jersey proper law trusts (“the Trusts”) as follows:
(i)
The R Trust,
established on 12th February 2009 to which transfers were made on 1st
April 2009.
(ii) The S Trust established on 11th
February 2009, to which transfers made on 30th March 2009, 10th
June 2010 and (in relation to a small amount) on 13th February 2013.
(iii) The T Trust, established on 9th February
2009 to which transfers were made on 1st April 2009.
(iv) The U Trust, established on 10th February
2009 to which transfers were made on 1st April 2009.
12. The initial funds settled into the Trusts were
HK$10 per trust, and in all, some £20 million was transferred into the
Trusts thereafter. The trustees are
Lutea and its associated company Lutea Hong Kong Limited (together “the
Trustees”).
13. An HMRC investigation into the tax affairs of
the Settlor began in 2013, but it did not encompass the Trusts until 2018. The Settlor deposes that the
investigation has been intrusive, costly and incredibly time consuming for
everyone involved. The position
taken by HMRC in relation to the Trusts is that, notwithstanding the ruling in
1996, the Settlor never acquired a domicile of choice in Hong Kong. They state that if the Settlor was able
to discharge what they describe as the “heavy burden” of
proving that he had acquired a domicile of choice in Hong Kong, his domicile of
origin had revived prior to 2009, as evidenced by his choice and actions in and
after 1997. The issue of the
Settlor’s domicile has yet to be resolved in so far as the Settlor
disputes the finding of HMRC and may appeal to the Special Commissioners.
14. The financial implications of HMRC succeeding
in establishing that the Settlor was U.K. domiciled when he settled the Trusts
are very significant. He has been
advised that the minimum IHT liability (comprising the entry charge, the ten
year charge and the exit charge) will be £7.1 million, but with interest
and penalties, the liability could match the value of the assets originally
settled, although he is advised that the penalties are more likely to be at the
lower end of the range.
15. The Settlor was advised that if HMRC succeed in
determining that he was U.K. domiciled, the longer the Trusts lasted, the more
tax would become due, and so the S Trust and the T Trust were terminated on 3rd
July 2020. We understand that the
other two trusts were not terminated, due to difficulties over agreeing the
security to be given to the retiring trustees.
Evidence
16. The Court has affidavits from the Settlor, his
wife, Mr Jenner, Mr Christian Brown of Lutea Hong Kong Limited and Ms Sonia
Shah of Bedell Cristin. The
application is supported by the Settlor’s wife and their three children
and by Advocate Staal, representing the unborn beneficiaries and the guardian ad
litem of the minor beneficiary. HMRC have been notified of the application
and do not wish to be joined as a party nor to make any representation, other
than to be informed of the outcome.
17. The Settlor’s affidavit is detailed and
comprehensive, but we would summarise his evidence as follows:
(i)
He is not
an expert in U.K. tax law and so delegated to and instructed those he thought
were the best people in the business at the time. He took their advice at face value and
did not second guess it. In
practice, he said Ms Chamberlain dealt with the technical side of things and Mr
Jenner translated the advice to him in telephone calls or during meetings. By 2006, Mr Jenner had been advising him
and his family for over ten years and was intimately involved in his tax and
financial affairs.
(ii) He made it clear to Mr Jenner and Ms
Chamberlain at the time that this was to be an exercise in removing risks. He had worked very hard for years and
the purpose of the entire exercise was to preserve the assets he had
accumulated for the benefit of his family.
(iii) He remembers very limited discussions about his
domicile and inheritance tax, which did not feature largely.
(iv) He did not remember either Mr Jenner or Ms
Chamberlain raising any real concerns about his domicile status. He remembered them telling him and it
was his clear understanding that unless his intention to return to Hong Kong
after the children finished their education had changed, his foreign domicile
would not have changed, particularly in light of the 1996 ruling. He remembered leaving every single
meeting or telephone call with the impression that he was “safe”
on domicile.
(v) Mr Jenner and Ms Chamberlain were at all times
very keen to proceed with the resettlement of the assets into the Trusts. The clear advice they gave was that
settling the Trusts was the best way forward for him and his family and he did
not remember either Mr Jenner or Ms Chamberlain discussing with him any
alternative structures or options.
(vi) He did not remember either Mr Jenner or Ms
Chamberlain explaining to him firstly that there was a real risk that HMRC
would argue that he was U.K. domiciled in 2009, secondly the actual monetary
ramifications that such an argument would lead to and thirdly, that there was
any risk that he might never have lost his U.K. domicile of origin. If he had been told of these things, he
would remember, and if they had been mentioned to him as a real risk, he would
have told Mr Jenner and Ms Chamberlain to re-visit what they were proposing to
do. He had no capacity to make his
own judgement call about the level or types of risks which have now been
identified with the benefit of hindsight; he relied entirely on the advice that
he was given at the time.
(vii) Whilst it would be right to say that as a
businessman, he took risks in his professional life, when it came to his family
and their financial security, he was incredibly cautious. He would never have risked the
possibility that at a minimum a quarter of the trust assets be paid away in
tax.
(viii) In conclusion, had he known that there was a
real risk that HMRC might well take the position that they have in fact taken
as concerns his domicile, and had he known the real level of risk that such a
substantial proportion of the funds might be decimated by tax liabilities to
HMRC, he would never have agreed to settle them. He would have asked Mr Jenner and Ms
Chamberlain to explore alternative structures. They never mentioned there was a serious
possibility of his being U.K. domiciled and indeed, the risk they mentioned
wasn’t even the right one.
They simply recommended a structure which it now seems clear ought never
to have been recommended.
The applicable law
18. The Court’s jurisdiction under the Trusts
(Jersey) Law 1984 (“the Trusts Law”) is engaged in two ways:
(i)
Under
Article 11, the Trusts can be declared invalid to the extent that they were
established by mistake. To the
extent held invalid, then pursuant to Article 11(6) the property shall be held
for the settlor absolutely or if dead, for his or her personal representatives.
(ii) Under Article 47E, the Court can declare a
transfer or other disposition of property to a trust voidable and having such
effect as the Court may determine or having no effect from the time of its
exercise. Pursuant to Article
47E(3), the circumstance in which such a declaration can be made is where the
settlor made a mistake in relation to the transfer or other disposition of
property to a trust, would not have made that transfer or other disposition but
for that mistake and the mistake is of so serious a character as to render it
just for the Court to make the declaration.
19. As the Court said in the case of In the
matter of L Trust [2019] JRC 195, citing In the
matter of the S Trust and In the matter of the T Trust [2015]
JRC 259, the following are points of broad application:
(i)
Article 11
of the Trusts Law relates to the invalidity of a trust as a whole;
(ii) In so far as transfers which were subject to
the application included the transfer which immediately constituted the trust,
Article 11 would seem to apply;
(iii) In so far as the transfer is made to an
existing trust, Article 47E would apply.
(iv) For the purposes of Article 11 and 47E, it does
not matter whether the asserted mistake was of fact or law, as to the effect or
as to consequences. Accordingly, a mistake as to the tax consequences of a
trust or a transfer to a trust is a mistake for these purposes.
20. The Court will look at the arrangements in the
round as was stated in the case of In the matter of the S Trust and In the
matter of the T Trust at paragraph 17:
“It would seem to be
inconceivable that the trusts themselves, constituted by the payment of
£20 into the relevant trust on the date it was established, would have
been made had there been any contemplation that the further dispositions later
made into trust were not to be made”.
21. Furthermore, as the Court said in Robinson
Annuity Investment Trust [2014] JRC 133 at paragraph 27:
“In many if not most cases,
the transfer of property will occur at much the same time as the creation of
the trust and the same mistake will be operating on the mind of the settlor
both in relation to the creation of the trust and the transfer of the property
to it.”
Such an approach was taken by the Court in Representation
of A in the matter of the G Trust [2018] JRC 159 at paragraphs 21 and 22.
22. In contrast, in the case of In the matter of
the C Trust [2020] JRC 120 (at paragraphs 26-33), the Court did not take
this approach, because in that case, it found that the mistake did not operate
on the mind of the settlor in connection with the original purpose for which
the trust was settled. It was only
later transfers of cash into the trust which were made in a way which
mistakenly gave rise to an unnecessary tax liability.
23. In the case before us, the Settlor established
the Trusts with HK$10 for the purpose of making the subsequent transfers, and
we are satisfied that, assuming there was a mistake on his part, it operated
upon his mind in relation to both the initial and subsequent transfers and, as
contended by Advocate Christie, it is appropriate for the Court to apply
Article 11.
24. Article 11(8) provides that an application
under Article 11 can be made by any person referred to in Article 51(3), namely
by the Attorney General, a trustee, a beneficiary or with the leave of the
Court by any other person. The
Settlor is a beneficiary of three of the trusts and we grant him leave to bring
the application in relation to the fourth trust of which he is not a
beneficiary, on the basis of his standing as settlor and his application being
supported by the adult beneficiaries.
25. Under the test summarised in Re Lochmore Trust [2010] JRC 068 and settled in Re S
Settlement [2011] JLR 375, and which is applicable to applications brought
under Article 11 of the Trusts Law, the Court must ask itself the following
questions:
(i)
Was there
a mistake on the part of the settlor?
(ii) Would the settlor not have entered into the
transaction ‘but for” the mistake?
(iii) Was the mistake of so serious a character to
render it unjust on the part of the donee to retain
the property?
26. In the case of In the matter of the S Trust
and in the matter of the T Trust, the Court said at paragraph 20 that:
“…. the judicial test,
in requiring the Court to consider whether it is unjust on the part of the donee to retain the property, seems … to contemplate
that the court is measuring justice by reference to the position of the donee … the focus of the statutory test, by contrast,
is whether it is just for the Court to make a declaration that a disposition of
property is voidable … because of a mistake made by the donor.”
and clarified
that there might be a factual circumstance where the distinction is relevant,
but that in most cases the result of the statutory and judicial tests will be
the same. The present case is one
where the application of the judicial or statutory test will yield the same
answer.
Decision
27. The Settlor has obtained an opinion from
another English counsel, Mr Barrie Akin, dated 1st March 2021 and he
said it was important to be aware of the way in which U.K. courts and tribunals
were approaching domicile issues in the period immediately before February
2009, when the Settlor created the Trusts.
The decision of the English Court of Appeal in Gaines-Cooper
[2008] EWCA Civ 1502 had been released on 23rd
October 2008 the principal significance of which was:
(i)
It
reinforced the proposition that in judging whether a person had acquired a
domicile of choice by a particular time, the fact-finding tribunal is entitled
to consider evidence of later events.
(ii) It also reinforced the point that the
fact-finding tribunal was advised to examine all relevant facts to arrive at an
objective assessment, with the statements of the propositus (the term used in
domicile cases to denote the person whose domicile is in issue in a
proceedings) being afforded little weight.
(iii) HMRC had been able to cast sufficient doubt on
the evidence of a living propositus to allow the special commissioners to
conclude that he had not discharged the burden of proof which is on the balance
of probabilities basis and to take more notice of surrounding circumstances.
28. Extracts from the Tax Journal illustrate that
there was a serious concern on the part of taxation practitioners at the time
that HMRC was becoming far more searching in its consideration of domicile
claims and was becoming less inclined to accept the word of the taxpayer as to
his or her intentions – at least where the amount of tax potentially at
stake was large. There was every
reason to believe then that HMRC would be more active in pursuing domicile inquiries
than had hitherto been the case, given their success in the Gaines-Cooper
case, and especially as Parliament had just enacted a considerable body of new
law on the question of remittances by non domiciliaries.
29. In Mr Akin’s
view, there was a material risk at the time that HMRC would take the view that
the Settlor was domiciled in the U.K. when he made the Trusts. At that time (2009), he and his family
had been resident in the U.K. for some 11 years and it was some 22 years before
they resumed residence in Hong Kong. That risk was substantially increased by
HMRC’s success in the Gaines-Cooper litigation and by the size of
the amount settled by the Settlor.
In his view, the most likely form of challenge by HMRC would be that the
Settlor had never acquired a domicile of choice outside the United Kingdom, a
tactically superior approach given what he described as the pervasive nature of
domiciles of origin and the incidence of the burden of proof, which rests on
the Settlor if he wishes to establish a domicile of choice in Hong Kong, but
which he can pass back to HMRC if, once Hong Kong domicile is established, HMRC
wish to allege a change of domicile back to the U.K..
Was there a mistake on the part of the Settlor?
30. The case of In the matter of the G Trust
[2019] JRC 056 authoritatively explained at paragraphs 12-16 why it is
inappropriate to make the distinctions made in English law as to incorrect
conscious beliefs, incorrect tacit assumptions, or mere causative ignorance,
because in the Court’s view such distinctions are rather artificial. That was an Article 47E case, but these
observations apply equally to an Article 11 case.
31. This application requires the Court to consider
whether the Settlor was operating under a mistaken belief when he settled the
Trusts. We find that he was on two
grounds:
(i)
First, he
believed that in so far as there was any risk as to domicile, it was a risk
that he might develop a U.K. domicile at some later date. In fact, the actual risk was that HMRC
would take the view that he had never lost his U.K. domicile, which was a completely
different risk with the burden of proof upon the Settlor and therefore of a far
more precarious nature. In our
view, this part of the test is met on this ground alone.
(ii) Second, by the time the Settlor settled the
Trusts, his belief (in reasonable reliance on the advice he received) was that
any risk in relation to domicile such as there was, was negligible. In fact, the risk was high. It will always be a matter of fact and
degree, whether a belief in relation to a risk is so far removed from a
realistic assessment of that risk that it can be described as mistaken. Whilst there will be grey areas in some
cases, in this case, we conclude on the facts that the Settlor’s belief
in relation to the risk of a domicile problem arising did amount to a
mistake.
32. In relation to the second ground, there is no
analysis in Jersey case law as to whether an operative mistake can exist
notwithstanding that the relevant person was aware of some risk that his belief
might be wrong. The position at
English law is discussed in detail in Goff & Jones, The Law of
Unjust Enrichment, 9th edition at 9-06 – 9-40. As to what amounts to a mistake in
English law and the types of knowledge analysed in Pitt v Holt [2013] 2
AC 108 and rejected by the Royal Court in the case of In the matter of the G
Trust, the approach taken by the English courts is unnecessarily rule
driven and artificial and, in our view, tends to obscure rather than illuminate
the process which the Court must undertake. In any event, on the test suggested in Goff
& Jones, there was clearly an operative mistake in this case.
33. The issue of the Settlor’s domicile has
not yet been determined, and he is still maintaining in the HMRC investigation
that he was not U.K. domiciled at the material time. However, it is not necessary in our view
for this application to succeed for the Court to conclude that the Settlor was
definitely domiciled in the U.K. in 2009.
34. In A and B v C [2018] JRC 174A, the
position in relation to the initial tax advice (i.e. whether it was right or
wrong) was disputed. The Court
decided at paragraphs 18-19 that it did not have to express a conclusive view
as to which tax advice was correct.
Instead, the Court concluded at paragraph 19:
“19. The Court does not feel it necessary at this point
to express a view as to which tax advice is correct. We have seen copies of the various
opinions or notes of conference settled by counsel, but those opinions have not
been tested with live evidence and cross-examination. HMRC, who have been given notice of
these proceedings in the usual way, have not expressed any view. However, whilst we do not feel able to
say that the tax advice on which the Representors are now proceeding is
necessarily right, it is certainly not necessarily wrong either. For the purposes of this application
only, we take it to be at least probably right. We think the position is that no
reasonable trustees would be expected to have taken the steps which the
Representors took in 2001 if they had known that the possible outcome of those
steps was exposure to IHT in sums of approximately £800,000 and the
exposure of the Settlor to capital gains tax on gains arising in the 2001
Trust. We are satisfied therefore
that but for the tax advice which was received, the 2001 Transfers would not
have been made. Accordingly, the
mistake made was not so much that there necessarily was a tax problem, but
rather that there was a probability that there was if the power were
exercised in the way it was, and in our judgment, the Representors would not
have exercised the power of appointment as they did but for that
mistake.” (our emphasis)
35. In this case, HMRC has made its position
absolutely clear that the Settlor never lost his U.K. domicile. If the Settlor had received advice in
2009 as to the likelihood that HMRC would adopt this position (and the
consequences which would flow if HMRC were successful) we find that he would
not have settled the Trusts. The
current factual scenario is therefore quite sufficient for the Court to reach
the conclusion that the Settlor was acting under a mistake. The alternative would be to suggest that
the Settlor would have to fight the HMRC investigation to its conclusion and
only make this application if he loses, which we accept cannot be right.
36. In the matter of the D, E and F Trusts [2016] JRC 166C, is another case in which a risk of tax exposure
has been held to be sufficient to support a finding of a mistake. It was said at paragraph 24:
“… he believed that in
making the transfers to the trusts in that form he was not only achieving the
U.S. tax objectives but also nullifying any risk which arose under the Swiss
Tax issue. In fact he was wrong
because with the trusts in the form they are, there is a risk of a substantial
U.S. estate tax charge. The mistake
was accordingly one which relates to the fiscal consequences or advantages of
the transfer. …”
37. The Court further stated at paragraph 27(i):
“Although the risk may be
thought to be far from certain of coming to pass … the potential tax bill
for their estates is huge.”
38. Accordingly, for the Court to conclude that a
mistake has been made, it is sufficient that the mistake has led to a risk of a
serious adverse tax consequence, even if it is far from certain whether that
risk will actually come to pass.
Would the Settlor not have entered into the transaction
but for the mistake?
39. This is a purely factual question. The Settlor’s evidence is that if
he had received the right advice as to the nature of the risk, and the level of
the risk involved, he would have absolutely not have entered into the transaction. The evidence suggests that the Settlor
was a careful man, who sought to pay what he believed were the best advisers
available for the best advice.
There is no reason at all to think that he would not have followed that
advice, had it properly identified the nature and level of the risk.
40. This is not a case where the Settlor was
entering into an artificial scheme to save large amounts of tax. The Trusts were relatively
straightforward structures. Mr Akin
describes the creation of the Trusts as a sophisticated but neither artificial
nor aggressive response to the revised statutory regime and points out that if
the application is successful, the Settlor will be exposed to tax on the income
and gains realised by the Trustees since the start of the Trusts, as having
been his income and gains.
41. We conclude, therefore, that the Settlor would
not have created the Trusts “but for” the mistake.
Was the mistake of so serious a character as to render it
unjust on the part of the donee to retain the
property?
42. In the case of In the matter of the G Trust at
paragraphs 17-22, the Court considered this third test which the Court must
apply, and made the following observations:
(i)
The Court
must first ask whether the mistake is of a serious character and then ask
whether it is just for the Court to make the declaration.
(ii) The seriousness of the mistake can be analysed
by reference to the effect both on the transferor and potentially on the
trustees and beneficiaries of the trust.
(iii) As to the question of justice (summarising
paragraphs 18-22), the Court might not step in to relieve settlors of the
consequences of artificial or aggressive tax avoidance which has gone wrong.
43. As to seriousness, if HMRC were to prevail in
the investigation process, the amount of tax due would be very substantial, and
depending on the penalties, in the words of Advocate Christie, potentially
catastrophic for the Settlor and his family.
44. As to justice, this is not a case where the
Settlor has sought to enter into an aggressive or artificial scheme to avoid
tax. There is nothing in the
structure which moves the Court to withhold the exercise of its
discretion. As to the
beneficiaries, they support the application, and will not be prejudiced in any
event, because the Settlor and his wife fully intend their wealth to go to
their children and remoter issue in due course. Furthermore, no third parties will be
prejudiced by the declarations sought.
45. The Courts have on a number of occasions
considered how it affects the exercise of their discretion, if the seriousness
of the mistake (i.e. the loss caused by it) could be mitigated by a claim in
negligence against an advisor who gave the original tax advice. In the case of In the matter of the E
Settlement [ 2018] JRC 143, the Court said at paragraphs 21(iii) to 22:
“21.(iii) The
alternative would be for action to be taken by one or more of the beneficiaries
against the Trustee and/or S&W.
This would not be clear cut … in any event, the Court remains of
the view expressed in Re Onorati Settlement
[2013] (2) JLR 324 where the Court said at paragraph 44:-
‘More generally, we are not attracted by the proposition that
beneficiaries should be left to a remedy of bringing litigation against
trustees or professional advisers.
The beneficiaries are usually not at fault and have already incurred
loss by reason of unnecessary tax charges.
To force them to incur further expense in what may be uncertain
litigation when the law allows for the avoidance of a decision made in breach
of the trustees’ duties seems unnecessary, undesirable and unjust.’
22. Onorati was of course concerned with the
Hastings-Bass principle rather than the law of mistake … However, the
sentiment expressed in the above passage from Onorati
seems to us to be equally application to grant relief under Article 47G.”
46. The same conclusion was reached, after a longer
discussion, in A and B v C, D and E [2019] JRC 111 at paragraphs 23-28
concluding at paragraph 28:
“… for the reasons
given we are not attracted to the proposition that the trustees should be left
to bring proceedings in negligence against the tax adviser in circumstances
such as these. Accordingly, we
think it is just to grant relief in respect of the trustees’
mistake.”
These observations apply, mutatis mutandis,
to the facts of the current case.
47. Whilst the Trustees do not oppose the application,
and have provided helpful information for the Court, they do not accept that
any inadequate or insufficient or deficient advice was given to the Settlor and
assert forcefully that there is no good claim in negligence. Any such proceedings would be likely to
be expensive, time consuming and stressful and of course, whatever the view may
be as to the merits, any litigation carries some litigation risk.
48. We conclude, therefore, that the mistake was of
so serious a character as to render it unjust on the part of the Trustees to
retain the property.
Delay
49. The remedy is a discretionary one, and delay
can be a ground for refusing relief – see In re the B Trust [2019]
JRC 035 at paragraph 30. In Mileham v Valla Limited [2020] JRC 045, there was a very
substantial delay of some four years before the applicants sought alternative
legal advice to that given by Baxendale Walker, and then another two years
elapsed before the representation was tabled. The Court said this at paragraph 30:
“30 We
do not think it would be right to punish the Representors for somewhat slow in
bringing this application by rejecting it as a matter of discretion. The fact is that the adverse
consequences for Mr and Mrs Mileham if the trust
continues will be very considerable.
They have been let down by advice from Baxendale Walker which has
already cost them substantially and we think it would be rubbing salt in the
wound by holding that, because they had taken some time to decide how best to
proceed, they should be denied relief.”
50. In this case, whilst the HMRC investigation
began in 2013, it did not encompass the Trusts until 2018, and the Settlor was
not advised that a mistake application was even possible until November
2018. Advocate Michael Cushing of
Appleby was instructed by Mr Jenner in late 2018 to consider the prospect of a
claim for mistake, and he advised on 4th December 2018 that there
were potential difficulties with such an application, given his understanding
gained from his instructions that the Settlor was alive to the risks in
settling the Trusts and was prepared to proceed notwithstanding those
risks. Ms Chamberlain further
advised against pursuing an application on the basis that it might prejudice
the HMRC investigation. The Settlor
accepted that advice.
51. In March 2019, the Settlor instructed Mr James
Quarmby of Stevenson Harwood to provide a second opinion on his tax position,
and initially, Mr Quarmby was predominantly occupied with the HMRC inquiry, and
future wealth planning. In late
August 2020, Ms Helena Berman, a litigation partner at Stephenson Harwood, was
instructed to investigate the Settlor’s options, and advice was taken
from Mr Robert Ham QC, who provided his opinion on the merits of a mistake
application on 17th January 2021.
52. We are satisfied that at every stage, the
Settlor has followed and relied upon legal advice and in the circumstances this
is not a case in which relief should be refused on the grounds of delay.
Declaration in relation to the trusts already terminated
53. Two of the trusts were terminated in July 2020,
and the question arises as to whether the Court has jurisdiction under Article
11 or Article 47E to make a declaration in respect of a trust that has
terminated in that all of the trust property has been distributed.
54. No authority on the point has been found, but
there is nothing in the wording of Article 11, or Article 47E, that precludes
the Court from making a declaration in such circumstances, and we therefore
find that the Court has jurisdiction to do so.
55. Although the trust property may have been
distributed, the exercise of such jurisdiction is not futile, in that there
remain liabilities arising out of the two trusts. There remains an IHT liability which
primarily falls upon the Settlor in respect of the assets settled and secondly,
upon the Trustees, who received those assets into trust. Even though trust property may have been
distributed to beneficiaries, it remains subject to the trustees’
equitable lien. For so long as such
rights and liabilities continue to exist in respect of a trust whose assets
have been distributed, the Court’s jurisdiction under Article 11, or
Article 47E, remains engaged.
56. The exercise of the Court’s jurisdiction
in these circumstances may give rise to problems in relation to the effect on
the recipients of the property distributed on termination, but as Advocate
Christie points out, that does not arise in this case, as the property was in
each case distributed to the Settlor.
In any event, the effect of a declaration upon beneficiaries or third
parties is a factor the Court would always take into account in deciding
whether to exercise its powers – see In the matter of the L Trust at
paragraph 17.
57. The fact that a trust had terminated might also
be relevant to the issue of delay, in terms of a failure to proceed promptly to
court to seek a declaration following that termination, but in this case, the
termination took place recently and, in our view, to the extent that there has
been any delay, it is not a ground to refuse relief in this case.
Orders
58. We therefore make the following orders:
(i)
We declare
that the Trusts are invalid on the grounds of mistake and are voided and of no
effect from the date they were purportedly made pursuant to Article 11(2)(b)(i) of the Trusts Law.
(ii) We declare that the trust assets have, from the
dates upon which they were received, been held on bare trust for the Settlor by
the Trustees.
(iii) The Trustees can retain the remuneration they
have already charged and the reimbursement they have already received for
expenses and liabilities reasonably incurred and can continue to charge their
reasonable remuneration and reimburse themselves for all expenses and
liabilities reasonably incurred up to this date.
(iv) The Trustees are relieved from liability for
any breach of the bare trust upon which they have held the trust assets, save
to the extent that any breach of a bare trust would also have constituted a breach
of the trusts for which the Trustees would have been liable had the trust
assets not been declared to have been held on bare trust from the dates on
which they were received.
59. A further discrete point arises in relation to
the order of the Court made ex parte on 12th
March 2021, permitting the Trustees to disclose documents in this case to their
insurers, to Ms Chamberlain and her insurers and to their respective legal
advisers. We direct the Trustees to
disclose to the Settlor’s legal representatives a copy of the written
application upon which that order was made.
Authorities
Trusts (Jersey) Law 1984 (As Amended).
In
the matter of L Trust [2019] JRC 195.
In
the matter of the S Trust and the T Trust
[2015] JRC 259.
The
Representation of the Robinson Annuity Investment Trust [2014] JRC 133.
Representation
of A in the matter of the G Trust [2018] JRC
159.
In
the matter of the C Trust [2020] JRC 120.
Re
Lochmore Trust
[2010] JRC 068.
Re
S Settlement [2011] JLR 375.
Gaines-Cooper [2008] EWCA Civ 1502
In
the matter of the G Trust [2019] JRC 056
Goff & Jones, The Law of
Unjust Enrichment, 9th edition at 9-06 – 9-40.
Pitt v Holt [2013] 2 AC 108.
A
and B v C [2018] JRC 174A.
In
the matter of the D, E and F Trusts [2016]
JRC 166C.
In
the matter of the E Settlement [2018] JRC
143.
A
and B v C, D and E [2019] JRC 111.
In
re the B Trust [2019] JRC 035.
Mileham v Valla Limited
[2020] JRC 045