Readers may recall our The Battle of Hastings–Bass piece (March 2011) about the cases of Pitt v Holt and Futter v Futter. Futter concerned trustees whose actions had created unexpected CGT liabilities; Pitt involved unanticipated IHT liabilities resulting from the creation of a discretionary trust. In each case the taxpayer claimed to be able to “undo” the actions and thereby escape the unlooked-for tax consequences. The recent unanimous decision in the Supreme Court clarifies the scope of trustees to undo their actions in this way.
It does this mainly by untangling the two distinct threads of “mistake” and “breach of fiduciary duty” which had got knotted up in the so-called “Hastings-Bass principle” and gives some clarity as to when each may apply.
First, it was held that the courts have the discretion (but not the obligation) to intervene to set aside and “undo” actions of trustees where the trustees have breached their fiduciary duty – in technical terms the actions are “voidable”, not “void”. Such a breach might occur where trustees act beyond the scope of their powers or contrary to the general law; but acting on the basis of professional advice does not involve breach of trust, even if the advice turns out to be wrong. Neither of the cases before them exhibited such a breach of trust.
Secondly and quite separately, a “voluntary disposition” (whether involving trustees or not) can be set aside where it is founded on a mistake, provided the mistake is serious enough. “Forgetfulness, inadvertence or ignorance is not, as such, a mistake, but it can lead to a false belief or assumption which the law will recognise as a mistake.” In some circumstances a mistake as to tax consequences can give grounds for rescission of a voluntary disposition, but the remedy is a based on the court’s equitable jurisdiction so will be used only where it would be “unjust or unconscionable” to leave the mistake uncorrected. For this reason it will seldom if ever be appropriate for the courts to grant the remedy in respect of a mistake made in the course of tax avoidance arrangements.
So: in Mrs Pitt’s case, the court agreed to set aside the settlement – there was nothing “artificial or abusive” in it. In Futter’s case rescission was denied. This was partly because the issue hadn’t been raised in any of the lower courts and there wasn’t enough evidence to consider for the first time in the Supreme Court; and partly because there was some doubt as to whether the Supreme Court should “assist in extricating claimants from a tax-avoidance scheme which had gone wrong”.
In a nutshell: we have all been roundly disabused of the notion that Hastings-Bass afforded a “get out of jail free” card; and as a result, actions against allegedly negligent advisers may become more prevalent.
To discuss these matters please contact Terry Jordan.
