Taxation - re: consequence of certain UK tax advice.

[2021]JRC171

Royal Court

(Samedi)

15 June 2021

Before     :

R. J. MacRae, Esq., Deputy Bailiff, and Jurats Thomas and Dulake

 

IN THE MATTER OF THE AVOCADO TRUST

AND IN THE MATTER OF THE BARE TRUST DECLARED BY AVOCADO LIMITED

Advocate O. J. Passmore for the Representors.

Advocate M. P. Cushing for the unascertained beneficiaries.

judgment

the deputy bailiff

Background

1.        On 7^th June 2021 the Court determined seven representations relating to seven trusts declared on 5^th April 2017 as a consequence of certain UK tax advice. 

2.        Although the beneficiaries under each trust were different, the factual background to each matter was similar and accordingly it was appropriate to hear the applications at the same time.  All the applications followed incorrect advice leading to the restructuring of a property-holding structure as part of which steps were taken with a view to minimising ongoing liability to Annual Tax on Enveloped Dwellings (“ATED”).  In this judgment we deal in detail with the facts relating to one of these applications and the reasons for the Court reaching the conclusions which it has. 

3.        As a schedule to this judgment we give brief particulars of the six other trusts, because to set out our reasoning in relation to those matters and the relevant factual background would be duplicative.  It is not necessary for that schedule to be published as, on the application of the Representors at the convening hearing, the Court ordered that all hearings in relation to the representations shall be in private and that any judgment shall be anonymised with any reference to the trust, unless the name of the trust did not identify the beneficiary or the underlying property owned by the trust, also anonymised.  The beneficiaries under each trust were convened to the hearing of all representations and where they could not be identified (for various Shar'ia law reasons that we do not need to summarise) Advocate Cushing was appointed to represent such persons pursuant to Rule 4/4 of the Royal Court Rules 2004. 

4.        The First Representor, Crestbridge Trustees Limited (“the Trustee”) is the Trustee of the Avocado Trust (“the Trust”).  

5.        The Second Representor, Avocado Limited (“the Company”) is the owner of a valuable residential property in London.  The Company is the principal asset of the Trust. 

6.        By way of background, the Company was incorporated in Jersey on 17^th July 2007.  On 7^th January 2008, the Company became owner of the property.  At that time, which was prior to the creation of the Trust, the ultimate beneficial owner of the Company was A, a member of the Family.  Initially, the Company was administered by a Jersey based fiduciary services provider now known as Intertrust but at the time called Ogier Fiduciary Services and subsequently Elian. 

7.        Crestbridge Family Office Services Limited (“CFOSL”) replaced Intertrust as administrative service provider for the Company in February 2016.  A Jersey company called B Limited, together with related entities, at all material times acted as the family office for the Family.  Towards the end of 2016 B Limited’s London legal adviser Payne Hicks Beach contacted Crestbridge in order to consider and advise Crestbridge and the Company on forthcoming changes to the UK Inheritance Tax regime that were to take effect on 6^th April 2017.  Ultimately, the Payne Hicks Beach advice was shared with Crestbridge, CFOSL and Intertrust (in respect of companies where they were still corporate service provider) on 20^th February 2017.  In summary, the advice stated that prior to 6^th April 2017 UK residential properties owned by non-UK companies the owners of which were non-UK resident and non-UK domiciled would fall outside the scope of UK inheritance tax.  The advice provided that the Company (and all seven companies which are the subject of these applications) all owned UK properties that were used personally by their ultimate beneficial owners and the companies were each liable to ATED. ATED is an annual tax on “Enveloped Dwellings”.  These are residential properties held in a company.  The Company is regarded as being the “envelope”.  De-enveloping is a process whereby the ownership of the property is transferred out of a company.  This is most obviously achieved by transferring it to an individual.  It may also be achieved, it seems, by transferring the property into a new trust and, in this case, subsequently transferring the beneficial ownership from the Company to a trustee. 

8.        The annual charge levied in relation to the value of the property payable by the Company was to be accompanied by the bringing of the properties into the Inheritance Tax regime so that any shareholder would be subject to inheritance tax in relation to their proportionate interest in the property at a rate of 40% on death, subject to the application of various reliefs and exemptions.  Charges to inheritance tax would also apply, albeit on a different basis, if the shareholder was a trust. 

The advice

9.        The advice recommended the transfer of the property into a new trust for the benefit of A and his heirs.  The advice was that transferring ownership of the properties into new trusts by 5^th April 2017 would remove or reduce the risk of inheritance tax exposure against the estates on the death of any shareholder or shareholders.  Where B Limited had provided contributions to the Company by way of loan, B Limited should capitalise the loan by converting the debt into shares.  B Limited would then purchase any remaining shares at par value from the current shareholder or shareholders – B Limited would then own all the shares. 

10.      B Limited would then settle the shares on trust for the benefit of the relevant beneficiaries.  In circumstances where funds had not been provided by B Limited but had been provided by the beneficial owners, the current beneficial owners would need to settle the trust for the benefit of their children and remoter issue, and would need to be excluded from benefit and would have to pay market value for any future occupation of the properties, otherwise the value of their properties would remain in their respective estates pursuant to the gift with reservation of benefit rules under UK tax law. 

11.      One consequence of setting up a trust was that from 6^th April 2017 there would be an inheritance tax charge of 6% on the net value of the UK property on the 10^th anniversary of the Trust creation.  However, the advice noted that provided the Trustee did not sell the properties, the tax could be paid in ten annual instalments, giving an effective rate of 0.6% per year plus any interest.  It was not submitted to us that the advice given in relation to Inheritance Tax by Payne Hicks Beach was correct.  

12.      As to avoidance of ATED, de-enveloping could be achieved by liquidating the Company or by the Company declaring that it held the property it owns on “bare trust” for its shareholders – in this case the Trustee. 

13.      The tax consequences of a declaration of trust on the part of the Company in these circumstances were considered and the advice provided reassurance that there would be no need to file an SDLT return because the transfer/declaration was not a chargeable event.  Further, there would be no IHT liabilities or reporting requirements to HMRC arising from the declaration of trust. 

Execution of the steps plan

14.      There was a steps plan document provided by Payne Hicks Beach which set out in detail four principal steps, comprising 14 specific actions required in order to secure the benefits recommended by the advice. 

15.      As envisaged by step 1 of the plan, A, C Limited [Redacted] and the Company decided to proceed with the transactions recommended by the steps plan as referred to in the minutes of the Company dated 30^th March 2017.  A memorandum of understanding was executed by A, the Company and B Limited on 4^th and 5^th April 2017 agreeing, inter alia, that the loans from C Limited would be converted into shares meaning that C Limited would become the majority shareholder in the Company and that A would transfer his shares to C Limited.  The relevant transfer forms were executed, thus steps 1 and 2 of the plan were carried out.  Pursuant to step 3, the Trust was settled by C Limited.  The Trust is a discretionary trust with the proper law being the law of Jersey.  The Trust is in reasonably standard terms with the sole beneficiary being A with a power to add further beneficiaries.  C Limited retained the power to remove the Trustee.  The Trust is irrevocable.  The shares in the Company were transferred from C Limited to the Trustee.  It is noted that all these transactions, including the creation of the Trust, took place on the same day, 5^th April 2017. 

16.      Step 4 was the “de-enveloping” step. 

17.      As to the de-enveloping, there was a meeting of the Board of Directors of the Trustee on 5^th April 2017.  Pursuant to the advice received from Payne Hicks Beach, the Trustee resolved to request that the Company hold assets in a nominee capacity for the trustee as Trustee of the Trust.  The terms of the nominee agreement between the Trustee and the Company set out in the recital that the Trustee wished to engage the Company with immediate effect to hold the property as bare trustee on behalf of the Trustee.  On 5^th April, the directors of the Company (there were two directors of the Trustee at the Trustee meeting and two directors of the Company at the Company meeting, one of them being common to both meetings) noted that C Limited had entered into an agreement with the Trustee to establish the Trust; that the nominee arrangement had been executed and that the Trustee of the Trust had requested the Company to hold the property, together with the cash held in respect of the property in two bank accounts, as nominee for the Trust.  Documents presented to the meeting included the nominee agreement and a Declaration of Trust which was “proposed to be given by the Company”.  The Declaration of Trust is a key document and was made by a director of the Company who swore an affidavit in support of the representation on 5^th April 2017.  The second recital provides that the Company “wishes to declare that it holds the Property on bare trust for and on behalf of [the Trustees]…”  The effective part of the instrument provides that, inter alia, the Company “holds the Property as nominee for and on behalf of the [Trustee]; [the Company] will not transfer, deal or dispose of the Property except where [the Trustee] may… direct; … the [Company] on receipt of a written instruction from [the Trustee] will promptly transfer the legal title of the Property to the [Trustee] or any third party as the [Trustee] may in writing direct”. 

18.      The declaration agreed that any dispute in relation to it would be governed by and construed in accordance with the laws of Jersey.  The director of the Company states that she was fully aware of the contents of the legal advice and the rationale of the transactions, as were her fellow directors.  Neither of them imagined that taking these steps would lead to a liability or a risk of liability to SDLT. 

19.      The assets of the Trust are currently worth £21 million. 

20.      The Trustee and the directors of the Company first became aware of possible complications arising from the 2017 restructuring when B Limited carried out a review in respect of the advice it had received in 2017.  In June 2020, it came to the attention of the Trustee that the advice given in 2017 may have been incorrect.  Ultimately, a written opinion was provided to the Trustee by Charles Russell Speechlys LLP and Roger Thomas QC dated 27^thApril 2021. 

21.      The advice says that the effect of the 2017 transactions was to give rise to a very significant risk of an SDLT liability for the Trustee in the sum of £3,513,750 (plus late payment interest of £424,187 and possible penalties). 

22.      The reason for this is the effect of step 4 of the transaction recommended by Payne Hicks Beach.  The advice given did not take into account the effect of Section 75A of the Finance Act 2003, which deals with anti-avoidance.  Section 75A applies where a person disposes of a “chargeable interest” and another person acquires it and a number of transactions are involved in connection with the disposal and acquisition.  Section 75A says that a “transaction” includes, inter alia, a “non-land transaction” and “any kind of arrangement whether or not it could otherwise be described as a transaction.”  The advice now received is that by reason of Section 75A there is a very significant risk that the Trustee will be treated as having entered into a transaction with the Company, the chargeable consideration for which was £24 million, thus giving rise to the SDLT liability for the Trustee set out above.  Counsel for the Representors specifically confirmed to us that it was step 4 of the steps plan that gave rise to the SDLT charge and that it was not going to be argued now or subsequently that the Trust itself and the actions carried out pursuant to steps 1, 2 and 3 were going to be the subject of any subsequent application to the Royal Court to set aside or avoid those steps. 

The applications to the Royal Court

23.      The Trustee and the Company made separate and alternative applications to the Court either of which, if granted, would address the adverse consequence of the 2017 reorganisation in respect of the potential charge to SDLT against the Trustee by reason of the bare trust declared by the Company in 2017. 

24.      The Trustee made two applications having the same effect pursuant to Article 47G of the Law and Article 47H of the Law respectively.  Article 47G is entitled “Power to set aside the exercise of powers in relation to a trust or trust property due to mistake”.  The relevant parts of Article 47G are as follows: 

“(2)     The court may on the application of any person specified in Article 47I(2), and in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and –

(a) has such effect as the court may determine; or

(b) is of no effect from the time of its exercise. 

(3) The circumstances are where the trustee or person exercising a power –

(a)        made a mistake in relation to the exercise of his or her power; and

(b)        would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that mistake, and

the mistake is of so serious a character as to render it just for the court to make a declaration under this Article.”

25.      A “mistake” is defined in Article 47B(2) of the Law as including for the purposes of Article 47G: 

“(a) a mistake as to –

(i)         the effect of,

(ii)        any consequences of, or

(iii)       any of the advantages to be gained by,

A transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property;”

26.      It has been established that a mistake as to the tax consequences of a transfer or other disposition of property to a trust may amount to a mistake of sufficiently serious character as to render it just for the Court to grant relief under Article 47G of the Law.  In the alternative, the Trustee sought relief under Article 47H of the Law which is entitled “Power to set aside the exercise of fiduciary powers in relation to a trust or trust property”.  The relevant provisions of Article 47H are: 

“(2) The court may on the application of any person specified in Article 47I(2), and in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and –

(a) has such effect as the court may determine; or

(b) is of no effect from the time of its exercise. 

(3)       The circumstances are where, in relation to the exercise of his or her power, the trustee or person exercising a power –

(a)       failed to take into account any relevant considerations or took into account irrelevant considerations; and

(b)       would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that failure to take into account relevant considerations, or that taking into account of irrelevant considerations.

(4)       It does not matter whether or not the circumstances set out in paragraph (3) occurred as a result of any lack of care or other fault on the part of the trustee or person exercising a power, or on the part of any person giving advice in relation to the exercise of the power.”

27.      In this case the Trustee did follow advice, and this is not a case of the Trustee taking into account irrelevant considerations.  However, because the advice that it received was incorrect, it did fail to take into account relevant considerations.  Although he was not commenting on the provisions of the Law, the judgment of Lloyd LJ in Sieff -v- Fox [2005] 1 WLR 3811 is of assistance:

“114. Looking at the appointment, therefore, it seems to me that, on the part of the trustees, it is vitiated by the failure of the trustees to take into account the true consequences of the appointment as regards capital gains tax, which they failed to take account of because they had been wrongly advised. In my judgment the consequences of the appointment as regards tax (in particular inheritance tax and capital gains tax) were matters which the trustees were under a duty to consider, which they did in fact consider, and to which they failed to give proper consideration because they were provided by their advisers with wrong advice on the point. I find that, if they had had the correct advice, they would not have made the 2001 appointment. Applying the Mettoy test as I have reformulated it above (paragraph 49) I find that the effect of the trustees' exercise of their discretion was different from that which they intended, that they failed to take into account considerations which they ought to have taken into account, and that they would not have acted as they did had they known the correct position as regards the charge to capital gains tax which would result from the appointment.”

28.      This approach was confirmed by the Royal Court in the J Settlement [2019] JRC 111 where at paragraph 19, Sir William Bailhache, Bailiff, giving the judgment to the Court said:

“It is contended before us that tax consequences are a relevant consideration for the purposes of Article 47G or 47H and reference in that respect is made to In the matter of the B Trust (Link Trustee Services) [2018] JRC 043.  We agree that a mistake as to the tax consequences of a decision has been held by the Royal Court on a number of occasions in the past to be a relevant mistake for the purposes of applications under the Law.”

29.      The Court’s power to grant relief under Article 47G and Article 47H is engaged when the Trustee (or other person) exercises a power over or in relation to a trust or trust property.  The specific nature of the power does not matter.  In this case the relevant Trustee minutes do not record that the Trustee consciously considered what power was being exercised.  Under Article 24(1) of the Law:

“Subject to the terms of the trust and subject to the trustee’s duties under this Law, a trustee shall in relation to the trust property have all the same powers as a natural person acting as the beneficial owner of such property.”

30.      Further, the Trustee has the following express powers pursuant to Schedule 1 of the Trust Instrument: 

“(A) carry out any transaction relating to the management or disposition of Trust Property as if they were absolutely entitled to it (Schedule 1, paragraph 1.1);

B) do anything which is incidental or conducive to the exercise of its functions (Schedule 1, clause 1.24).” 

31.      These powers are broad and operate so as to enable the Trustee to manage and administer the Trust assets in the interest of the beneficiaries.  The minute of the meeting of the Trustee recorded that the Trustee requested that the Company hold the assets in a nominee capacity for the Trustee as trustee of the Trust; approved the terms of the Nominee Agreement pursuant to which the Company agreed to hold as bare trustee the property particularised therein and authorised directors of the Trustee to execute the Nominee Agreement.  We find that in so doing the Trustee was exercising its powers over or in relation to the Trust or trust property. 

Our decision

32.      Applying the law to the facts of this case, in respect of the application under Article 47G, we find that the Trustee did not believe that its decision to procure the Company to hold assets in a nominee capacity would give rise to a risk of a substantial SDLT liability.  The directors of the Trustee did not believe that procuring the Company to hold the assets would give rise to such a liability.  Indeed, they were assured by written advice that there would be no such liability and no need to file an SDLT return.  In fact, there is a significant risk that the Trustee has incurred such a liability. 

33.      Accordingly, the Trustee made a mistake in relation to the exercise of its power.  It would not have exercised the power but for that mistake.  As to the seriousness of the mistake, that is a matter to which the Court has given some anxious consideration as the effect of setting aside the exercise of the power and the consequential documents executed is that although the Trustee will no longer be liable to SDLT, the Company will be liable to ATED which in the course of the next 10 years or so will exceed the amount that is due and payable now by way of SDLT.  However, we were told and have been persuaded that a relatively modest annual ATED payment is more affordable, manageable and preferable to suffering a large charge to SDLT now.  Accordingly, on balance, we have concluded that this mistake can be categorised as being a “serious” mistake as required for the purposes of Article 47G.  As the Court recognised in the matter of G Trust [2019] JRC 056, the question as to whether or not the mistake is of “so serious a character” and whether it is “just” for the Court to make a declaration under the Article are separate issues. In G Trust, the Court said at paragraphs 17 and 18: 

“17.    We would like however to add some further commentary as to the third test which the Court has to apply – once it is satisfied that there has been a mistake made in relation to the transfer into trust and that that transfer would not have been made but for the mistake, the Court needs to ask itself whether the mistake was of such a serious character as to render it just for the Court to make a declaration.  The grammar of the question makes it plain that there are two component parts; the first is to whether the mistake was of a serious character and the second as to whether it is just for the Court to make a declaration.  The seriousness of the mistake will often be analysed by reference to the effect both on the transferor and potentially on the trustees and beneficiaries of the trust.  In the context of taxation consequences, the mistake may not be of a very serious character if the quantum of tax exposure is very limited as compared with the value of the Trust Fund or of the remaining assets held by the transferor, although that might also depend on whether there are any future consequences including the loss of future potential in relation to the trust as a result of the particular transfer which is impugned.  The mistake would also be of a serious character if the consequence of the mistake is that different people would have the right to benefit from the transfer than the transferor intended – the trust, for example, might include the spouses or partners of the beneficiaries whereas the transferor thought it was the beneficiaries alone who could benefit, or it might be a fixed income trust where the transferor thought it was a discretionary trust, or vice versa.  All those types of mistakes are capable of being serious.

18.      The question of justice is more nuanced.  It is well settled that mistakes in relation to tax are capable of being taken into account by the Court in deciding whether or not to set aside a transfer or disposition into trust or indeed the trust itself…”

34.      In this case, even though the consequence of making the declarations sought would be to transfer a UK tax liability from the Trustee (SDLT) to the Company (ATED) we are of the view that, bearing in mind the common beneficial ownership of both and the fact that the application is supported by the Trustee, the principal beneficiary and the representative of the unascertained beneficiaries, that it is just to make a declaration under Article 47G. 

35.      As to the application of the facts to the relief sought under Article 47H, the true tax consequences of the decision of the Trustee to procure the Company to hold the property in a nominee capacity were plainly a relevant consideration that the Trustee should and purported to take into account.  The Trustee did not believe that there would be a risk of SDLT liability because it had received the legal advice referred to above.  Accordingly, noting above the approach of Lloyd LJ in Sieff -v- Fox and the Jersey authority referred to, the Trustee failed to take into account a relevant consideration (the true tax consequence).  Had the Trustee known of the true position, it would not have procured the Company to hold the assets in a nominee capacity.  This is not a case where there was any breach of duty on the part of the Trustee and, even if there were, it would not matter under Article 47H(4). 

36.      No third parties will be prejudiced by granting a declaration under Article 47G or Article 47H.  The Attorney General was notified of the hearing and did not wish to be heard.  HMRC were also notified and wished to be notified of the outcome of the hearing.

37.      We were invited to consider the propriety of making consequential orders under Article 47I(3).  Article 47I(3) provides:  

“Without prejudice to Article 51 and subject to paragraph (4), the court may, consequential upon a declaration made under any of Articles 47E to 47H, make such order as it thinks fit.”

38.      As a consequence of the making of a declaration under Article 47G or Article 47H, we were invited to set aside the Nominee Agreement and the declaration of the bare trust by the Company.  We note that in the matter of the Z Trust [2016] (1) JLR 132, Commissioner Clyde-Smith, giving the judgment of the Court, said at paragraph 46 that the Court found there was sufficient link between the exercise by the settlor of a power of appointment and the retired trustee’s subsequent retirement as trustee of the trust and other transactions that “they should be treated as one related transaction for the purpose of this application so that having set aside the exercise by the settlor of the power of appointment, with the effect that the retired trustee’s retirement as trustee was invalid and ineffective, then, pursuant to art. 47I(3) of the Trusts Law, the transfer of the company’s shares and the resignation of the retired trustee officers as directors and officers of the company and the appointment of the purported director as director and officer of the company are also set aside as a necessary consequence thereof and consistent therewith, and we so order.”

39.      We have considered whether there are any realistic alternative practical remedies in these circumstances.  The only other option to the Representors would be litigation against the provider of the advice.  This would be uncertain, expensive and we note that Crestbridge and the Company, although they relied upon the advice from Payne Hicks Beach did not enjoy a direct contractual relationship with them. 

40.      Accordingly, we granted the application of the Trustee and ordered that the exercise of the power by the Trustee by which it procured that the Company holds the trust property as nominee for the Trustee is avoided and of no effect from the time of its exercise pursuant to Article 47G(2)(b), or Article 47H(2)(b) of the Law.  Further, we ordered pursuant to Article 47I(3) of the Law that in consequence the Nominee Agreement made between the Trustee and the Company is set aside and is void and of no effect from the time it was entered into and that the declaration of bare trust by the Company is also set aside on the same terms. 

41.      As to the Company’s alternative claim for relief on the footing that the bare trust ought to be set aside on the grounds of mistake pursuant to Article 11 of the Law, or, in the alternative Article 47E of the Law, it is not necessary for us to set out the arguments, detailed as they were, in view of our conclusions above.  Nonetheless, if we had been required to determine that application then it would have been determined in favour of the Company with the bare trust being set aside ab initio on the grounds of mistake, either pursuant to Article 11 or Article 47E. 

42.      Finally, as indicated, this Trust was one of seven and as an appendix to this judgment we set out the name of the Trust, identity of the named beneficiaries, description of the assets; a description of the SDLT liability and the identity of the administrator of the underlying company on 5^th April 2017 for the purposes of identification of the same.  In each case, identical advice was received in 2017 and similar advice in respect of the deficiencies in that earlier advice was received in April 2021.  Accordingly, we granted similar relief (identical save for the identification of the relevant trust property) in relation to those six trusts for the same reasons as are set out in this judgment. 

Authorities

Royal Court Rules 2004. 

Sieff -v- Fox [2005] 1 WLR 3811.

J Settlement [2019] JRC 111.

G Trust [2019] JRC 056. 

Z Trust [2016] (1) JLR 132