Trust – representation seeking an order that transfer of money to
the two trusts be set aside on grounds of mistake and declared void.
[2015]JRC259
Royal Court
(Samedi)
16 December 2015
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Before :
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W. J. Bailhache, Bailiff, and Jurats Kerley and Liston
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Between
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A and B
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First Representors
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And
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C and D
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Second Representors
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And
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Nautilus Trustees Limited
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First Respondent
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And
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Advocate Robert Gardner Guardian ad litem
for the minor beneficiaries of the T Trust
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Second Respondent
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IN THE MATTER OF THE S TRUST AND IN THE
MATTER OF THE T TRUST
AND IN THE MATTER OF ARTICLES 11, 47E
AND 51 OF THE TRUSTS (JERSEY) LAW 1894
Advocate J. P. Speck for the Representors.
Advocate J. Harvey-Hills for the Trustees.
Advocate R. Gardner appeared in person.
judgment
the bailiff:
The S Trust
1.
The First
Representors brought their representation on 8th January, 2015,
seeking, inter alia, an order that
the transfers of money by them into a trust known as the S Trust be set aside
on the grounds of mistake and declared void or voidable and of no effect. The First Respondent is the trustee of
that Trust which was established by a trust instrument dated 22nd May,
2008, between the First Representors and the First Respondent (“the S
Trust”). The beneficial class
includes the First Representors, the four children of the First Representors,
all of age and none of whom appeared, any trust association body or other
organisation in any part of the world the objects of which are charitable, and
any person added to the class of beneficiaries by the trustee (none). The Trust was constituted by an initial
settled figure of £20, and subsequently each of the First Representors
added the sum of £984,750 to the trust fund by transfers made in July
2008. The first named of the First
Representors, A, has a lifetime interest in possession in the trust fund, and
his wife (B) has a lifetime interest in possession if her husband should
predecease her. Subject thereto,
the First Respondent was given a discretionary power of appointment to hold the
trust fund of the S Trust and its income for the benefit of the beneficiaries. The mistake which it is said gives rise
to the application to have the transfers referred to set aside is a mistake as
to the tax consequences of the actions of the First Representors in making the
transfers into trust. Accordingly,
Her Majesty’s Revenue and Customs were notified of these proceedings and
provided with a copy of the Representation and the Act of Court from the
convening hearing. On 29th
January HMRC acknowledged receipt of the copy documents and requested copies of
the affidavits and evidence submitted in support of the application. We understand that such documents were so
provided, and representations were made by HMRC in this connection, by letter
dated 27th March, 2015, to the Judicial Greffier. We deal with these in more detail below.
2.
The
circumstances surrounding the establishment of the S Trust were these. The First Representors were informed of
a scheme by the Second Representors which the latter had entered into, the
purpose of which was to minimise inheritance tax. They were introduced to a Nautilus
Trustees Limited, an independent financial adviser, of Kevin Neal Associates
Limited (“KNAL”). In or
about February 2008, KNAL outlined to the First Representors the details of an
inheritance tax mitigation scheme, the intention of which was to enable the
First Representors to pass on their main capital asset, their house in Surrey,
to their children on their deaths, free of inheritance tax. The basic structure of the scheme was
that the First Representors would borrow approximately £4.2 million from
a bank, EFG, whose lending would be secured by a mortgage over their property. The mortgage would be on interest only
roll-up terms. With the borrowed
sum, the current mortgages on their property would be redeemed and thereafter
the remaining amount would be transferred by the First Representors into an
offshore trust. They understood
this would have the effect of reducing the value of their estates for the
purposes of inheritance tax by creating a liability which would be taken into
account when valuing their estates for inheritance tax purposes. KNAL advised the First Representors that
the trustee of the Trust would invest the trust fund in structured notes and in
a fund which invested in life insurance policies which between them would
generate a sufficient return to cover both the interest on the loan from the
bank and create a source of independent wealth for the family of the First
Representors. Thus it was said
there would be no risk to capital as a result of entry into the scheme and
inheritance tax would be saved.
3.
In June
2008, the First Representors agreed the terms of a loan from EFG for the
equivalent of £3.5625 million in Swiss Francs. The First Respondent gave a guarantee of
the First Representors’ debt due to EFG, and by way of security assigned
the bond in which the First Respondents had invested as trustee of the S Trust.
The loan from EFG to the First
Representors was drawn down in two tranches.
By the first draw down in June
2008, the original mortgages on the property of the First Representors were
discharged and the second draw down in July 2008 was substantially transferred
to the First Respondent as trustee, and then invested in a bond duly assigned
by way of security to EFG as lender.
4.
Far from
being an effective scheme for avoiding inheritance tax liabilities, the scheme
proposed by KNAL was a fiscal disaster. The Court is informed that the effect of
the transfers made in July 2008 were as follows:-
(i)
The
transfer gave rise to an immediate 20% inheritance tax charge over and above
the nil rate band, creating a tax liability on each of the First Representors
of £183,787.50.
(ii) The sum transferred was subject to the “relevant property” regime
for inheritance tax purposes, and the consequence was that if the trust fund
remained as relevant property, it would be subject to 10 yearly charges
following the settlement. The rate
of such charge has not been fixed, but may be up to 6% of the value of the
Trust. The first charge would arise
in the First Representors’ case in July 2018.
(iii) If the trustee were to transfer assets away
from the settlement so that the property ceased to be relevant property for
these purposes, the transfers would give rise to charges which are sometimes
called exit charges. The rate of
charge, we are told, was a proportion of the 10 yearly rate depending on the
duration of the settlement.
(iv) To add insult to injury, the effect of the Finance
Act 1986 was that the trust property was not enjoyed to the exclusion or
virtually to the exclusion of the First Representors as donors, and it followed
that the trust property was treated as remaining within their estates for
inheritance tax purposes. The
consequence was that not only were there the 20% entry charge and 10 yearly
charges, but also the First Representors would be deemed to be beneficially
entitled to the Trust assets for inheritance tax purposes at the date of their
death if the Trust property remained in trust, and thus the ostensible
objective of the scheme would not have been achieved.
5.
The First
Representors brought proceedings on 12th October, 2012, against EFG,
KNAL and Mr Kevin Neal personally in the High Court. These proceedings were vigorously
defended but ultimately compromised by means of a settlement agreement as a
consequence of which EFG agreed to indemnify the First Representors in respect
of any UK inheritance tax and income tax charges relating to the transfers to
the S Trust and in relation to the investment in the relevant bond. The indemnity is expressly conditional
upon the First Representors taking steps reasonably required by EFG to reduce
their tax liabilities by lawful means.
The First Representors had become aware of the possibility of applying
to set aside the transfers into trust for mistake when EFG explicitly stated
this to them in October of 2013.
6.
The Court
is informed that the outcome of the present application, for UK tax purposes,
is that none of the relevant tax charges would be payable if the Court were to
grant the relief sought.
7.
In the
context of delay, the First Representors became aware of the inheritance tax
problems in September 2009, and, as set out above, later commenced the
litigation in England. They did not
become aware of the possibility of an application to this Court until October
2013 and accordingly they contend that they have proceeded timeously since then
and that the delay has been neither protracted nor deliberate.
The T Trust
8.
The underlying
facts surrounding the T Trust are very similar to those set out above. In or about July 2007, Mr Neal of KNAL
had outlined to the Second Representors the details of an inheritance tax
mitigation scheme, the purpose of which was to minimise the amount of
inheritance tax which the Second Representors’ children would have to pay
on the death of the survivor of the Second Representors. The structure of the scheme was that the
Second Representors would borrow approximately 95% of the value of their
property from a private wealth bank, the lending of which would be secured by a
charge over their property. The
mortgage would be rolled over so that borrowings would not be repaid until the
death of the survivor of the Second Representors unless the property was sold
in the meantime, and interest on the mortgage would be rolled up. The borrowed sum would be transferred by
the Second Representors into an offshore trust, where it would be invested in a
series of low risk investments such as government gilts or bonds and capital
guaranteed structured notes which would generate sufficient return to cover
both the interest on the loan from the bank and any charges and fees associated
with the scheme. It was said that
the scheme would make a return of approximately 10% every year, 5% of which the
Second Representors would be able to withdraw from the scheme tax free. It was said that they could exit the
scheme without penalty at any stage if they wished to do so.
9.
The Second
Representors decided to enter into the scheme and in November 2007 made a trust
with the First Respondent (the “T Trust”), with an initial payment
of £20 to constitute the trust fund. The first named Second Representor had a
lifetime interest in possession in the trust fund but if he predeceased his
wife, she would then have a life interest and possession thereafter. As a result, the first named Second Representor
had the right to enjoy the income but not the capital of the trust fund during
his lifetime and his widow would enjoy the income after his death should he
predecease her. The First
Respondent as trustee had a discretionary power of appointment over the trust
fund and the income for the benefit of any of the beneficiaries which included
the four children of the Second Representors, any trust association body or
other organisation in any part of the world, the objects of which are
charitable, and any person added to the class of beneficiaries by the trustee.
10. In November 2007, the Second Representors
agreed a loan from EFG for the equivalent of £4.75 million in Swiss
Francs. The monies were paid into
the T Trust. EFG required a
guarantee from the trustee and an assignment over the bond in which the trustee
was to invest, all by way of security for the loan which it had made to the
Second Respondents. This all duly
took place and was completed by January 2008.
11. The tax consequences of the transfers to the T
Trust were these:-
(i)
The
transfer gave rise to an immediate 20% inheritance tax charge over and above
the nil rate band, which in effected created a tax liability of
£526,100.20 on each of the Second Representors.
(ii) The sum transferred was subject to the “relevant property” regime
for inheritance tax purposes, and thus subject to 10 yearly charges following
the settlement.
(iii) Should the trustee transfer assets from the
settlement so that the property ceased to be relevant property, the transfers
would give rise to exit charges.
(iv) The effect of the Finance Act 1986 was
that the trust property was not enjoyed to the exclusion or virtually to the
entire exclusion of the Second Representors as donors, and as a consequence, if
the T Trust remained in place with those assets within it, not only would the
20% inheritance tax entry charge and 10 yearly charges apply, but the Second
Representors would also be deemed to be beneficially entitled to the Trust
assets for inheritance tax purposes and the whole purpose of the scheme
therefore would be defeated.
12. The Second Representors brought proceedings
against EFG, Mr Neal personally and KNAL in the High Court in London. Trial commenced on 2nd December,
2013, but were compromised by a settlement agreement dated 17th December,
2013, between the Second Representors, EFG, KNAL and Mr Neal by which EFG
agreed to indemnify the Second Representors in respect of any UK inheritance
tax and income tax charges relating to the transfers into the T Trust and in
relation to the investments in the relevant bond. The indemnity was expressly conditional
upon the Second Representors taking steps reasonably required by EFG to reduce
their tax liabilities by lawful means.
13. The Second Representors’ representation
was presented to the Royal Court on 9th January, 2015. The Court ordered that the First
Respondent and the two adult children of the Second Respondents should be
convened, and also ordered that Advocate Robert Gardner be appointed as
guardian ad litem to represent the minor beneficiaries of the T Trust and
served with the documents accordingly.
HMRC and HM Attorney General were to be notified of the existence of the
proceedings. In February, HM
Attorney General confirmed he had no observations to make on the relief
sought. The Second Representors
received confirmation from HMRC that consideration was being given as to
whether any representations should be made to the Jersey Court, and
representations were in fact made by letter dated 27th March to the
Judicial Greffier. We will deal
with the detail of those later in this judgment.
14. The representation was heard on 31st
March when Advocates Speck, Harvey-Hills and Gardner were heard, and judgment
was reserved.
The Law
15. Prior to 25th October, 2013, there
was an established line of authority in relation to the setting aside of a
trust established by mistake. Article 11 of the Trusts (Jersey) Law 1984
(“the 1984 Law”) provides that a trust is invalid to the extent
that the Court declares that it was established, inter alia, by mistake. The test in relation to applications
under Article 11 is well settled. In
The matter of the Lochmore Trust [2010] JRC 068,
the Court confirmed that there were three questions to be addressed:-
(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 as to
render it unjust on the part of the donee to retain the property?
16. This test has been applied on so many occasions
that no further discussion of it is necessary in this Court.
17. It is to be noted however that this is an
Article of the 1984 Law which deals with the invalidity of the trust as a
whole. Sometimes it might be said
that a trust is valid and that the settlor or donor made a mistake not in
relation to the trust but in relation to a disposition into it. The Court has approached such an issue in
the past with realism. The
arrangements in relation to the trust are generally looked at in the round, and
taking the S Trust and the T Trust as examples, 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.
Of course on some occasions the matter is academic – where the
trust is constituted by the mistaken disposition into trust, the effect of
finding that the disposition would not have been made is that the trust would
not have been constituted and one can therefore say the trust fails on account
of the mistake. As this Court said
in The Representation of the Robinson Annuity Investment Trust [2014]
JRC 133, when considering the impact of the new Articles commencing with
Article 47A introduced to the 1984 Law in 2013:-
“The introduction of these
provisions immediately raises the question of the relationship between Article
11 and Article 47E. We have to say
that, like the court presided over by Bailhache, Deputy Bailiff, in Boyd v Rozel Trustees (Channel Islands) Limited [2014] JRC 056
we have not found this to be very easy. Article 47E appears to be dealing only
with dispositions to a trust whereas Article 11 is dealing with the trust
itself; but in many cases the two are inextricably linked, because without any
trust property there can be no trust. Furthermore, 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. It is therefore somewhat surprising to find the legislature dealing with
the creation of a trust and the transfer of property to a trust in completely
separate parts of the law.”
18. In the present case, there was some distance in
time between the establishment of the two Trusts and the disposition of assets
into trust, but looking at the circumstances surrounding the arrangements as a
whole, we have no doubt that the two were inextricably linked. However, this Court does recognise that
there may be factual circumstances where that is not the case. In such an instance, the provisions of
Article 47A et seq,
introduced by the Trusts (Amendment No.6) (Jersey) Law 2013 carry
particular relevance.
19. In the Robinson Annuity case, the Court
considered whether there was in fact any difference between the test enunciated
by the Courts and the statutory test set out in Article 47E(3). The full text of Article 47E is in these
terms:-
“47E Power to set aside a
transfer or disposition of property to a trust due to mistake
(1) ...
(2) The court may on the
application of any person specified in Article 47I(1), and in the circumstances
set out in paragraph (3), declare that a transfer or other disposition of
property to a trust –
(a) by a settlor acting in person
(whether alone or with any other settlor); or
(b) through a person exercising a
power,
is voidable and –
(i) has
such effect as the court may determine, or
(ii) is of no effect from the time
of its exercise.
(3) The circumstances are where the
settlor or person exercising a power –
(a) made a mistake in relation to
the transfer or other disposition of property to a trust; and
(b) 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 a declaration under this
Article.”
20. As the Court indicated in the Robinson
Annuity case, the only difference between the test adumbrated in the cases
and the statutory test is that the wording concerning the seriousness of the
mistake is inverted. In the
statute, the Court decides whether a mistake is so serious as to render it just
for the Court to make a declaration under the Article, whereas in the
judicially adumbrated test in relation to mistake, the question is whether the
mistake is so serious as to render it unjust on the part of the donee to retain
the property. Sir Michael Birt,
Bailiff, considered that this was a distinction without a difference but of
course he cannot have had in mind circumstances such as exist in the present
case. It appears to us that there
is potentially this difference between the statutory and the judicial tests
– 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 us to
contemplate that the Court is measuring justice by reference to the position of
the donee – is it just for the donee to retain the property in the
circumstances of the mistake? 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 to a trust is voidable
with some or no effect as the Court determines because of a mistake made by the
donor. These are very fine margins,
and whilst we agree that in most cases the result of the statutory and the
judicial tests will be the same, we are not sure that there will not be some
factual circumstances which might make the distinction between the two tests
relevant.
21. In the Robinson Annuity case, the
application was to have the trust itself declared invalid and the Court
approached the matter under Article 11. In the present case, the application is
to have the transfers of money made by the First Representors into the S Trust
and by the Second Representors into the T Trust set aside on the grounds of
mistake and declared void or voidable and of no effect. In so far as the
transfers included the transfer which immediately constituted the Trusts,
Article 11 would seem to apply. In
so far as the transfers were made to an existing trust, Article 47E would
apply.
22. What is clear is that whether one is looking at
the matter under Article 11 or under Article 47E, it does not matter whether
the mistake was of fact, law, as to the effect or as to the consequences. Accordingly a mistake as to the tax
consequences of a trust or a transfer to a trust is a mistake for these
purposes (see Re S Trust [2011] JLR 375). We agree with Sir Michael Birt, Bailiff,
that the definition of “mistake” in Article 47B(2)
is to like effect (see paragraph 29 of the Robinson Annuity case).
HMRC representations
23. Although the initial dealings with the two
trusts were with different branches of HMRC, letters dated 27th March,
2015, in relation to each trust were sent to the Court by the solicitor’s
office, in each case emanating from the team leader of the property taxes team.
The two letters are very similar. The essential point made were these. Firstly the mistake in question was not
a mistake for which the Royal Court should give relief because the mistake,
such as it was, lay in the tax consequences of the transfers into trust and did
not lie in the nature of the transfers themselves. Reliance was placed upon paragraphs 99
– 108 in Pitt v Holt and Futter v Futter [2013] UK SC 26. It was pointed out that Lord Walker
distinguished a mistake from mere ignorance or inadvertence and in particular
reliance was placed on his statement, at paragraph 108 of his judgment, that
mere ignorance, even if causative is insufficient. This expanded the earlier distinction
between causative ignorance which was not a mistake and an incorrect conscious
belief or an incorrect tacit assumption, which could be regarded as mistake. It was therefore submitted that the
Representors respectively had not made an actual mistake which could be
rescinded. After all, they knew
that they were transferring money into trust, they knew the value of the money
they were transferring and they knew that the money would sit within the trust
which it did. What they did not
know was that a United Kingdom inheritance tax liability would arise, and that
the tax planning which they had put in place would not in fact be successful in
avoiding that liability. This was
mere ignorance.
24. Secondly, HMRC relied upon paragraphs 114
– 123 of Lord Walker’s judgment and in particular emphasised at
paragraph 122 his statement that there would have to be some mistake either as
to the legal character or nature of the transaction or as to some matter of
fact or law which was basic to the transaction. Accordingly, it was submitted that their
mistake was a mistake as to the tax consequences rather than to the effect of
the transaction.
25. Finally it was submitted that it would not be
unconscionable to leave the transaction uncorrected because the motivation for
setting up the trust and transferring money into the trust was to mitigate a
tax liability and there were no special circumstances regarding consideration
such as is the case with Pitt or Futter.
26. The first point we would like to make about
these representations is this. Pitt
v Holt is a decision of the Supreme Court which although not strictly
binding naturally receives in the Royal Court of Jersey the utmost respect. Nonetheless, the Supreme Court is
concerned with the law in Great Britain and Northern Ireland, and not with the
law of Jersey. Any appeal from a
decision of the Royal Court of Jersey goes to the Privy Council and not to the
Supreme Court. This is not a
distinction without a difference.
The Privy Council can be expected to have regard both to the law and to
the policy interests to the Island of Jersey in deciding an appeal from the
Jersey Court of Appeal and the Royal Court, considerations which obviously
played no part in Pitt v Holt.
In one sense that is obvious. The Island’s legislature has
adopted statutory provisions by the Trusts (Amendment No.6) (Jersey) Law
2013 which have no application in Great Britain and Northern Ireland, but
which do form part of the law of Jersey which the Privy Council would naturally
apply. No doubt in addition, the
Privy Council would wish to pay careful regard to the numerous judgments of the
Royal Court over a prolonged period, and the views expressed by at least four
different judges on this subject. Indeed, although at paragraph 121, Lord
Walker appears to distance himself from the conclusions of Lloyd LJ in Pitt
v Holt when he expressed the view that some recent cases about offshore
trusts did not accord with English law, the fact that the analysis of these
differences happens at all demonstrates that the Royal Court operates from a
different juridical root.
27. The second point to make is that in different parts
of Lord Walker’s judgment, it may be thought that he placed emphasis on
other factors than those on which HMRC rely. When considering the issue of whether
the mistake on the part of a donor had to be either as to the legal effect of
the disposition or as to any existing fact basic to the transaction, Lord
Walker said this at paragraph 122:-
“But I can see no reason why
a mistake of law which is basic to the transaction (but is not a mistake as to
the transaction’s legal character or nature) should not also be included,
even though such cases would probably be rare … I would provisionally conclude that the
true requirement is simply for there to be a causative mistake of sufficient
gravity; and as additional guidance to judges in finding and evaluating the
facts of any particular case, that the test will normally be satisfied only
where there is a mistake either as to the legal character or nature of a
transaction or as to some matter of fact or law which is basic to the
transaction.”
28. We think the summary of the “true
requirement” is in effect the “but for”
test which is the second part of the Lochmore Trust
and is reflected in Article 47E(3)(b) of the 1984 Law, as amended. All parties before us accept that the
whole purpose of these gifts into trust was to mitigate tax liabilities in the
United Kingdom. Rather than
mitigate them, the transfers in fact exacerbated them. They did not do so for any reason other
than that there was at least one fundamental mistake made as to the taxation
law of the United Kingdom. Representations
which invite this Court to go back into distinctions between consequences and
effect, or into whether mistakes were mistakes of law or mistakes of fact in
our view invite the Court to head off in the wrong direction. There is no doubt that the two pairs of
Representors understood the legal nature of a trust and understood that they
were making transfers of money into a trust. However, as we now go on to discuss, and
quite contrary to the representations of HMRC, it is not the case that their
mistake was not basic to the transaction – it was fundamental to the
transactions, because, but for their mistakes, the transactions would never
have occurred.
Discussion
29. We start with the first two questions –
which are the same whether the Lochmore
questions or the circumstances set out in Article 47E(3)(a) and (b) are
applied.
30. We have no doubt that in both the case of the S
Trust and in the case of the T Trust, the First Representors and the Second
Representors respectively made a mistake. They were advised and believed that
entering into these arrangements and establishing the Trusts would avoid
inheritance tax on the assets which were put into the Trusts. Very possibly they should not have believed
that. As it is so often said, when
a scheme appears too good to be true, it probably is not true. However, we accept that the mistake was
made in each case, and that but for it, neither pair of representors would have
made the transfers into trust which they did. They thought, apparently, that whilst
continuing to live in their homes, they could place the property into trust,
receive an income from it and at the same time ensure that the full value of it
would pass to their children on their death free of inheritance tax. Had they realised the tax consequences
were quite what they were, we have no doubt that the transfers would not have
been made.
31. Accordingly, we now come to the third question
– under the judicial test in relation to setting aside a trust under
Article 11, was the mistake of so serious a character as to render it unjust on
the part of the trustee to retain the property? Under the statutory test, was the mistake
of so serious a character as to render it just for the Court to make a
declaration that the various transfers of property into trust should be set
aside and have no effect? In each
case the consequence of making such a declaration would be to return the funds
in question to the transferors. In
our view, the answer to the two tests is the same and so the question of which
test to apply does not arise.
32. If the transfers into trust were not set aside,
there would be the following consequences:-
(i)
The
beneficiaries of the two Trusts, including the respective Representors, would
continue to enjoy the benefits of the property in trust.
(ii) The beneficiaries other than the Representors
would have a vested interest as putative beneficiaries in the Trust property.
(iii) As far as the First Respondent is concerned, it
will have the ability to charge fees for its services.
(iv) It is unlikely that there will be any tax
liability for either the Trusts or the Representors because of the EFG indemnity.
In most cases of this kind, the
exposure to tax represents a real consideration, indeed usually the overriding
consideration, in measuring where equity lies, because the donor is generally
subject to a significant liability which only arises as a result of the mistake
and which the Court considers it would be unfair to require him to pay. Here that is not the case. If EFG ends up being responsible for the
tax which is due, that can hardly be said to be inequitable, because the
company has agreed its liability in that respect.
(v) On the other hand there will be the
possibility, and at least in so far as the Morgan Settlement agreement is
concerned the probability, of ongoing litigation with all the stress for the
families which that entails.
33. The absence of any financial consequences
adverse to the beneficiaries has made this an extremely difficult analysis. We do not consider that the fact that the
children of the two pairs of representors will no longer have a vested claim to
be considered recipients of the underlying trust property is significant
– in all probability, they will ultimately receive an inheritance from
their parents in any event, and the Court is prepared to proceed on that
assumption.
34. At the end of the day, therefore, it comes down
to the question of whether the equity lies in setting aside some transfers into
trust which would not have been made if the Representors respectively had
realised the true fiscal consequences of making them only on the basis of the
stress which will be experienced by them if the orders are not made. In so far as the Second Representors are
concerned, their children, for whom Advocate Gardner has been appointed
Guardian ad Litem, are aged 9 and 12 respectively, and any emotional stress on
the parents will almost certainly have an effect on their upbringing.
35. The evidence before us is to the effect that
there has been very hard fought litigation in the High Court to achieve the
result that ultimately the Representors achieved. By the time of trial, only EFG was in the
frame as a defendant with assets, KNAL having been placed in liquidation and Mr
Neal himself being a man of straw.
EFG itself vigorously denied liability at the time the trial started and
it was only after it had commenced that a settlement agreement was reached
– one of the key factors in reaching such a settlement for the
Representors was that they were running out of money in order to fund that
litigation, and both pairs of Representors had difficulties with their family
businesses as a result.
36. There is something unattractive about the
proposition that the Court should come to the rescue of foreign tax payers who,
anxious to avoid paying the contribution towards the outgoings of their own
jurisdiction’s government, and thus meet their own obligations as
citizens of that jurisdiction, make schemes of this nature. No doubt they congratulated themselves
for some years on the smart move which they had made to avoid the relevant
taxes and get benefits for themselves in the meantime. The Court can have only limited sympathy
for those people who later find that actually things have not worked out quite
as they planned, and here of course the sympathy is even less because there is
no financial downside if the Court were not to come to their rescue, because
they have an EFG indemnity.
Nonetheless, by a small margin, the Court has determined to exercise its
discretion to set the transfers aside and grant the relief in the prayers to
the representations. It does so
without any sympathy at all for EFG as the indemnifier, and with only some
sympathy for the Representors – and that sympathy arises from a
recognition that all litigation is stressful, and that risky litigation against
professional advisers between 2009 and 2013 would obviously have generated a
great deal of anxiety for them; and indeed that anxiety would have been
increased by the knowledge that if the litigation were to be unsuccessful,
there were really serious tax consequences flowing from the misguided attempts
to avoid their obligations as citizens of the United Kingdom in the first
place. The Court thinks this was a
pretty naked attempt to avoid those obligations. In the event, we are granting the relief
because we recognise the stress of the last three years for the Representors,
and the stress of this litigation as well. We recognise the possibility, perhaps
even probability, that a refusal of relief is likely to lead to further
litigation on appeal, and given their tax position will be the same if we make
the order as it would have been if the transfers into trust had not been made
in the first place. On balance we
think that these Representors and their families have suffered enough.
37. For these reasons, the prayers to the two
representations are granted and we order that the transfers of money be the
Representors respectively into the S Trust and the T Trust are set aside on the
grounds of mistake and declared to be of no effect. The First Respondent is thus declared to
hold, and to have at all times held, the money transferred by the First
Representors on bare trust for those Representors in equal shares, and likewise
the money transferred by the Second Representors on bare trust for those
Representors in equal shares.
Authorities
Finance Act 1986.
Trusts (Jersey) Law 1984.
In The matter of the Lochmore Trust [2010] JRC 068.
The Representation of the
Robinson Annuity Investment Trust [2014] JRC 133.
Trusts (Amendment No.6) (Jersey) Law
2013.
Re
S Trust [2011] JLR 375.
Pitt v Holt and Futter v Futter [2013] UK SC
26.
Trusts (Amendment No.6) (Jersey) Law
2013.