Insights

03.04.2022

Mini summary

The Royal Court of Jersey was approached by the settlor of a Jersey discretionary trust to set aside certain transfers into the Trust through a bank account held in London with EFG Private Bank (“EFGL”). Subsequent analysis determined that adverse UK tax consequence for the Trust arose from these Transfers from a UK bank. The settlor applied to the Court to set aside the Transfers on the grounds of mistake pursuant to Article 47E of the Trusts (Jersey) Law 1985 (as amended). The application was successful.

The case is of interest for the clear review of the circumstances under which the Court will support a mistake application. However, while in the present case Jersey trust law did provide a bridge over which the settlor could walk away from the adverse consequences of UK tax law, it would be unduly optimistic to assume that this will always be a reliable route out of trouble. As such, the case can be seen as a salutary reminder of the need for caution in considering transactions where UK tax law might be in point.

The practical implications of the case

In a successful mistake application, the Court may declare that a transfer to a trust is voidable. The case considers different types and provides clear outlines for trustees of the circumstances which the Court will consider: has the settlor or person exercising a power made a mistake in relation to the transfer? would the transfer not have been made but for the mistake? is the mistake of so serious a character as to render it just for the Court to void the transfer?

Having established that a mistake about the tax effects of a particular transaction has been made, it is well established that this can be treated as a relevant mistake for the purposes of Article 47E (see above). However, while establishing that a mistake occurred is a necessary condition before voiding a transaction, that is not the only criterion. Before setting aside a transfer, the Court will consider whether it would be unjust on the beneficiaries of the settlement to do so. A further factor is whether the position of third parties would be prejudiced by such a setting aside.

On the voiding of the transfer, the Court has 3 options: to declare the transfer void and of no effect from the time it took place; to declare it void from the time it took place but nonetheless to have had such effect as the Court may determine; to declare the transfer to be voided from a date subsequent to the time it took place.

The background to the case

The settlor, L, was a banking client of EFGL. At the time of the settlement, 2013, L was neither UK resident nor UK domiciled. Following the establishment of the Trust, 3 transfers of cash were remitted from L’s EFGL account and treated as additions to the trust fund. These were used by the Trustee to help fund the purchase of shares in Jersey Co 1 and to provide funds to cover some expenses in Jersey Co 2.

In her affidavit, L maintained that she relied on EFGL to inform her if potential tax issues might arise such that she needed to take tax advice. EFGL did not so inform her and so she assumed that no tax issues would arise from the transfers. In fact it subsequently came to light that adverse tax consequences arose from the Transfers. L then applied to the Court to set aside the Transfers on grounds of mistake.

Her three adult children who were co-beneficiaries with her supported the application as did the Trustee. HMRC was notified but confirmed it did not wish to make representations. The Attorney General, representing the interests of the default charitable purposes was notified but responded that he was content to rest on the wisdom of the Court.

The Court Decision

In applying the law to the facts in the case, The Court considered the criteria required for a successful mistake claim (as indicated in section 2 above).

1(a) The settlor had made a mistake in instructing that the Transfers should be made. The Transfers resulted in a considerable IHT consequence which would not have arisen but for the Transfers. The trust structure had been adopted for estate planning purposes to ensure the assets placed in the Trust would “stay in the family blood line”. She mistakenly believed the Transfers would be tax neutral.

2(a) Given the adverse tax consequence, the Court had no doubt that the settlor would not have entered into the transactions ‘but for’ the mistake.

3(a) As to the seriousness of the mistake, depending on how the liability was discharged the Court noted that it would cost between £230K - £290K to discharge plus interest. In the Court’s view, that was clearly serious.

The mini-summary above stresses that a mistake application should not be viewed as a consistently reliable means of avoiding an unintentional tax bill. In this case:

1(b) On the settlor’s mistake, the judgement stresses the innocence of the settlor in the matter. She ‘relied completely’ on EFGL, had ‘complete trust’ in them, and had ‘no way of knowing’ about adverse tax consequences.

2(b) The mistake of triggering a tax liability could have been simply avoided by providing funds from a non-UK bank account held by the settlor.

3(c) Apart from the size of the tax bill, the seriousness of the mistake was compounded by the fact that it triggered a UK IHT bill on assets available to the settlor and her family which would in no way have arisen other than through the Transfers through a UK bank account.

Not all cases considering a mistake claim will have these elements of innocence of approach, an entirely unnecessary tax consequence and a clear route to avoid it. Nor will the Court always have all parties – HMRC, default charitable representative, all beneficiaries – either supporting or at least not opposing the application.

In these circumstances, where there are transactions which touch upon the UK in any way, given the raft of complex new legislation largely designed to catch perceived offshore avoidance, advisers may conclude that it is prudent to seek advice to avoid mistakes in the first place than seek to rectify them after the event.