Trust.
[2022]JRC052
Royal Court
(Samedi)
28 February 2022
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Before :
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Sir William Bailhache, Commissioner, and
Jurats Ramsden and Cornish
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Between
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A
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Representor
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And
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B
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First Respondent
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C
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Second Respondent
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D
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Third Respondent
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(both in his own name and as Guardian ad
item or, and Representative of minors and remoter issue of C and D)
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R & H Trust Company (Jersey) Limited
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Fourth Respondent
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IN THE MATTER OF THE REPRESENTATION OF A
AND
IN THE MATTER OF THE E SETTLEMENT
Advocate R. J. McNulty for the Representor.
The Respondents did not appear.
judgment
the commissioner:
Introduction
1.
This was
an application by the Representor under Article 11 and/or Article 47E of the Trusts
(Jersey) Law 1984 (the “Law”) to have a Declaration of Trust
constituting the E Settlement on 2 April 2008 (the “Trust”) set
aside on the grounds of mistake and/or a declaration that any funds transferred
and/or settled into the Trust are held on bare trust by R & H Trust Company
(Jersey) Limited (the “Trustee”) on behalf of the Representor and
have been so held at all times, with further relief. Notice of the proceedings was given to
Her Majesty’s Revenue and Customs (“HMRC”) with a copy of the
Representation and convening Act of the Court and the Court has seen a response
to the effect that HMRC will not apply to be joined to the proceedings and do
not intend to make any representations at the hearing. The proceedings have been heard in
private but the present judgment will be anonymised and published in the usual
way. A copy of the unredacted
judgment is however to be provided by the Representor to HMRC.
The law
2.
This
Court’s approach to applications of this kind is well settled. The Court considers the facts of the case
against three questions:
(1) Was there a mistake on the part of the
Representor in relation to the establishment of the trust or the transfers of
assets into trust?
(2) Would the trust or transfers into trust not
have been made but for the mistake?
(3) Was the mistake of so serious a character as to
render it just for the Court to make declaration?
3.
A recent
summary of some of the relevant cases is set out in Q v Lutea Trustees
Limited and Others [2021] JRC 166.
The facts
4.
The
Representor is the sole economic settlor of the Trust. He has an English domicile of origin
having been born in England and raised in that country and, following the
separation of his parents, in Scotland.
He left the United Kingdom in 1959 and settled in Papua New Guinea,
moving to Australia in anticipation of a declaration of independence by Papua
New Guinea in 1978. At that time,
he was married to an American with whom he had two children and, although he
has subsequently divorced and remarried, his first wife, both children and he
all have Australian citizenship.
His children were educated in Australia.
5.
Having
separated from his first wife, the Representor returned to the UK in 1993 to
manage a substantial estate in the UK (the “Estate”) which had been
in the ownership of his family for decades, but it had fallen into disrepair
over the years after his father’s death. The Representor and his first wife
divorced in 1997 and the following year he married the First Respondent, and
they have lived in the main hall on the Estate. Although the Representor has retained
substantial properties in Australia, his main source of income has been the
farming income from the Estate.
6.
In 1996,
on the advice of his accountants, he submitted a domicile application to HMRC
which was ultimately accepted on 18th February 1998 when the Inland
Revenue wrote to his accountants to say:
“It is accepted that [the
Representor] is not domiciled within the United Kingdom at present.”
It is to be noted that the application for
the acceptance of his Australian domicile omitted reference to his forthcoming
marriage to the First Respondent, a person domiciled in England, which might
have been thought to be a relevant factor, and the application also did not
disclose the interest in property in the United Kingdom – technically
accurate, but the Representor was certainly living and had the benefit of the
Estate, a historic family estate to which we have referred.
7.
There were
further domicile inquiries by HMRC in 2016 and the following years. On 26th November 2020, formal
notice was given to the Representor’s accountants that HMRC was
considering the question of the Representor’s domicile at relevant
times. HMRC subsequently sent on 23rd
April 2021 a detailed letter to the Representor’s accountants concluding
that his domicile of origin had subsisted throughout his life to the present
day, but alternatively, if he had acquired an Australian domicile of choice
prior to 1993, which was not agreed, his England and Wales domicile of origin
had revived prior to 2008. Full
details of the reasons for that approach are set out in the letter from HMRC.
8.
It is not
for us to determine where the Representor was domiciled at different times in
his life, albeit there is no doubt he had a domicile of origin in the United
Kingdom. However, the question of
his domicile was clearly a matter of relevance in the context of the fiscal
treatment of the Trust, to the details of which we now turn.
9.
While
resident in Papua New Guinea, the Representor purchased a coffee plantation and
established himself in that business.
It became very successful and over the years he purchased three more
plantations and a coffee marketing company. He also established a trading arm which
exported coffee to North America and Europe. The coffee business was very profitable
and in 1973 he established in Hong Kong a company called H Limited. The Estate was owned in 1993 by a Trust
of which the Representor’s first wife and his children were
beneficiaries. It was held
indirectly through an Australian operating company called I Limited. Although hitherto managed by agents of I
Limited, it was agreed with the Trustees of that Trust that the Representor
would undertake the management of the Estate and ensure it was put on a sound footing
for the benefit of his children, with a view to one of them taking over in due
course.
10. Towards the end of 2007, the Representor became
aware that changes to the United Kingdom tax legislation regarding UK resident
but non-domiciled individuals were being discussed. The Representor took advice. We have seen a copy of some notes of a
meeting between the Representor and his accountant and lawyer. The First Respondent was also present. The meeting note opens with the
commentary:
“[The Representor]
confirmed that he still intended to return to Australia at some stage.
If [the Representor] remains
resident in the UK, he will become deemed domiciled on 6 April 2011. This will only be relevant for
inheritance tax purposes, and will have no impact on [the Representor’s]
domicile under the general law (relevant for capital gains tax and income tax
purposes).
For inheritance tax purposes,
the effect of [the Representor] becoming domiciled in the UK, will be that he
will liable to inheritance tax on his worldwide assets. In effect, therefore, this will bring
into the UK tax net, his non-UK situs assets. Essentially, these are [the Australian
estate] and his holding of shares in H Limited.”
11. The same file note refers later to a different
trust of which the Representor was the settlor and his children were
beneficiaries. The meeting note
records that with effect from 6th April 2008 the Representor would
be liable to tax on any gains realised in that trust. These would extend to any gains realised
by I Limited.
12. The discussion in this meeting then turned to H
Limited. The Representor is
recorded as having confirmed that he owned the shares in H Limited, but that
ownership had never been disclosed to HMRC. There was an assumption that H Limited
was a non-resident company, and in order to establish that, it would be
necessary to show that the management and control of the company occurred
offshore. The Representor confirmed
that management was conducted by a firm in Hong Kong, and that was where
decisions were taken. H Limited was
registered with HMRC and paid tax on its UK income under the non-resident
landlords’ scheme. All this
was particularly relevant because there were two proposed transactions in the
UK involving the sale of land.
There were two sales of land owned by H Limited in the UK – one at
£450,000, which was expected to be completed in February 2008, but a much
more substantial sale, for £2,600,000, which was a conditional sale
subject to the securing of planning permission. The meeting note records that if
unconditional contracts were entered prior to 5th April 2008, any
changes to the capital gains taxation rules would not apply and the gains
realised in H Limited on the sale of the land would not be attributable to the
Representor. However, after 5th
April 2008, the gains would be immediately taxable on him and would not be
taxable on a remittance basis.
13. This meeting was, as it were, the critical
opener to the arrangements which later followed. However, it is clear from this meeting
note that the Representor was aware that as of April 2011 he would be deemed
domiciled in the United Kingdom and that that would have serious inheritance
tax consequences. It is also clear
that capital gains on the two proposed transactions of land in the UK were a
real issue if the proposed contracts could not be completed before 5th
April 2008.
14. We have not been provided with detail as to the
arrangements for the sale of the land but there are two important emails
passing between the professional advisers of the Representor, into which he was
copied. On 11th
February, his estate agents sent an email to the Representor’s lawyer
who, it appears, was handling the property transactions in the UK. The agents posed a number of questions
of which one was – is there any risk of the past arrangements being
challenged and set aside if [the Representor] dies while still resident in the
UK? The Representor’s lawyer
responded that ‘HMRC accepted [the Respondent] was non-domiciled at
the end of 1990s, as I recollect. I
think it would be all but impossible for them to go back on that’. A few days later, the
Representor’s accountant sent an email directly to the Representor and
the remaining professionals in which he added ‘The new non-dom rules
remain a moving target as business and political opposition to them continues
to build’.
15. The second relevant subsequent email which we
have seen was sent on 19th March, by the legal advisers to the
accountant. It was said that there
was a good possibility of exchanging unconditional contracts before 5th
April 2008. However, although there
were no absolute benefits identified in settling the H Limited shares before 5
April 2008, it appeared there were benefits in the long-term in doing this and
there was no downside in doing so before 5th April. Indeed, there was a potential advantage
because it would neutralise any thinking on the part of the purchaser that they
had a good negotiating position against I Limited because of the latter’s
wish to exchange before 5th April. As was said in this email, settling the
shares before that date would mean that as vendors they could not be ‘pushed
into a corner’. The email
also contains a potentially revealing comment that the Representor was
attracted by the idea of stripping some funds out of H Limited before the gift
of shares was made – these could be put in an offshore account in the
names of trustees of a UK discretionary trust for the benefit of the First
Respondent and the Representor’s children. The intention would be to have ‘clean’
funds which could be available to the First Respondent in due course as
necessary without any offshore complications. The accountants’ response was that
the H Limited shares should be settled before 5th April. The proposal to ‘clean’
funds for the First Respondent made excellent sense as it would enable the
Representor to take advantage of this one-off opportunity to transfer funds for
the benefit of the First Respondent in a tax free way.
Discussion
16. Although we accept that the law of domicile is
not always straightforward, we do not think there is much doubt that persons in
the position of the Representor would generally be expected to have a firm
grasp of the headline issues – the fact that a person had a domicile of
origin, and that he could, by a combination of residence and intention, abandon
that domicile and acquire a domicile of choice elsewhere. We also consider that most people in the
position of the Representor would be well aware of the fiscal advantages in the
United Kingdom from being a non-domiciled resident of the UK. It is unsurprising that when there was
the public debate about the tax treatment of non-domiciled UK residents in
2007/2008, the Representor not only became aware of that debate as relevant to
him, but also saw the need to take professional advice. This Court is not so naïve as to
accept at face value statements by a settlor or economic settlor sometime after
the event that he could not possibly have contemplated that very substantial
tax liabilities might have been incurred as a result of the arrangements he was
putting in place. The arrangements
in question were undoubtedly conceived with a view to preventing substantial
tax liabilities or maintaining substantial tax advantages.
17. As has been said in some of the earlier cases,
there is something fundamentally unattractive about the Court being asked to
come to the rescue of those who have made arrangements with a view to saving
themselves large amounts of tax, only to find later that for other reasons
those arrangements were not as successful as had been contemplated. We will come on to address the detailed
questions we need to address shortly but it is important, in our judgment, to
emphasise that there is all the difference in the world between a settlor
taking a calculated risk in making particular arrangements and a settlor who is
genuinely mistaken about the risks which he is undertaking. In the former case, there should be no
sympathy for such a settlor. He
gambled and lost. In the latter
case, the Court, as demonstrated by the authorities, looks with more sympathy
on such a settlor because although his motivation – saving tax –
remains the same, he carries no personal culpability, albeit his professional
advisers probably do. The approach
which this Court has taken on many occasions in the past has been to relieve
the settlor in the latter case from having to engage in risky litigation
alleging negligence against professional advisers, with all the difficulties
which may be incurred either with prescription, liability, or remoteness of
damage. Often, settlors in that
position do not have deep pockets with which to fund such litigation, whereas
the defendants or their insurers do, and there is frequently, perhaps almost
invariably, the substantial stress of litigation often in the twilight years of
the settlor’s lifetime.
18. Against that background we now turn to the
three questions. The first is
whether there was a mistake on the part of the Representor. The Representation
is supported by all the Respondents.
HMRC have chosen not to engage.
It follows that there is no one to contend that the Representor did not
in fact make a mistake at all.
19. The mistake which he alleges he made is that he
failed to recognise that HMRC might be able to reopen the question of his
domicile. Analytically, the
evidence on whether this was or was not so is capable of supporting either
conclusion. The correspondence in
1997 with the Inland Revenue showed that claims to have acquired a domicile of
choice by abandoning the domicile of origin always needed investigation because
a domicile of origin has strong and adhesive qualities. There is a presumption in law in favour
of its continuance and the burden of proving the acquisition of a domicile of
choice lies on those who allege it has taken place. Those comments by the Revenue in June
1997 were clearly discussed with the Representor because a very full letter
addressing those comments was sent by the Representor’s accountant to the
Revenue in October that year. In
our view, looking at the matter objectively, anyone reading the Revenue’s
letter of 18th February 1998 that ‘It is accepted that [the
Representor] is not domiciled within the United Kingdom at present’
(emphasis added) could not possibly disregard the emphasised language. It was as clear as could be that the
Revenue were accepting the position for the time then being. Of course, the time then being involved
a man who had spent almost all his adult life out of the United Kingdom, having
been a resident away from the UK between 1959 and 1993, a period of some
thirty-three/thirty-four years. If,
despite that lengthy period away from the UK, the Revenue were not giving an
unequivocal confirmation to last forever, how much more must the situation have
been obviously in doubt by 2007 when the Representor’s circumstances had
changed – he had married an English woman and had at that point been
living in the United Kingdom for fourteen years, returning only occasionally to
Australia. Not only was he living
in the United Kingdom, but in particular was living in premises that had
accommodated his family for decades.
20. In those circumstances, the confirmation of the
English lawyer for the Representor that it would be all but impossible for HMRC
to go back on their acceptance that the Representor was not domiciled in the UK
at the end of the 1990s is hard to accept.
The Representor ought to have realised it was hard to accept, at least
as an unequivocal confirmation, because the covering email from the lawyer
indicated that he was away that week but these were ‘immediate
comments’.
21. More favourable to the Representor is the email
of 19th March 2008 where the lawyer said unequivocally that he could
see no downside in settling the H Limited shares before 5th April
2008. The lawyer ought to have
realised that there was a potential downside if HMRC revisited the question of
domicile; and we think perhaps he was influenced in part, at least, by the
negating of any negotiating advantage which the purchasers of land at I Limited
might have in any last minute departure from the agreed deal because of
potential capital gains tax liabilities.
22. In this case there has been exhibited to the
Representor’s affidavit an amount of correspondence between the
Representor and his lawyers and accountants at the relevant time. The Representor makes it plain that he
does not waive privilege in the advice obtained or in the documents
provided. We are not aware that
this point has been tackled directly in the previous cases, but for the
avoidance of doubt, we do not consider that it is a satisfactory approach. Proceeding in this way in theory allows
too much latitude to a representor to make a partial disclosure of the true
position in circumstances where experience shows the Court will not have the
benefit of contested argument. In
our judgment, it is essential that representors seeking relief of the kind requested
in the present proceedings should provide all relevant correspondence and file
notes for the Court’s consideration.
This is likely to be essential in enabling the Court to make a proper
assessment as to the merits of the settlor’s claim that he or she has
made a mistake.
23. In the present case, the Representor has
deposed on affidavit that he was not advised as to what the inheritance tax
consequences would be if in fact he were treated by HMRC as domiciled in the UK
in April 2008 and that his advice to settle the H Limited shares in trust was
to avoid personal liability for the resulting capital gains tax, mitigating the
impact of the anticipated change to Section 13 of the Taxation of Chargeable
Gains Act. This would also have
removed the pressure to exchange contracts for the sales of land before 6th
April 2008. There is no evidence to
the contrary, and despite the fact that common sense might suggest that the
matter was more nuanced than has been contended for, such documentary evidence
as there is tends to suggest that the submissions of the Representor are
correct. In those circumstances,
with some hesitation, we have concluded on the balance of probabilities that
the Representor did make a mistake in 2008 as to the possibility that HMRC would
challenge his assertion that his domicile of choice in Australia might have
been lost.
24. The second question is whether the Settlor
would not have entered into the transactions ‘but for’ the
mistake. The position at this stage
is that it is unclear as to where the Representor was domiciled in 2008 for
fiscal purposes. What we do know is
that HMRC have challenged the assertion that the Representor ever lost his
domicile of origin in the United Kingdom, and have also challenged the
assertion that, even if he did lose his domicile of origin, he still retained
his domicile of choice in Australia in 2008. If HMRC are correct in their analysis of
domicile, this would give rise to very substantial inheritance tax liabilities. We are told that it would amount to at
least £604,988, plus interest of £202,943 if the inheritance tax
liability is discharged by the Representor, or £483,990 plus interest of
£178,354 if discharged by the Trust.
Furthermore, there is a ten year anniversary charge payable on the value
of the Trust of £3,277,206 in April 2018, amounting to
£196,632. Interest running on
this sum is currently not less than some £18,191. In summary, the inheritance tax charges
total some £1,025,112 if the Representor was domiciled in England at the
date the Trust was set up in April 2008, approximately one-third of the value
of the Trust. We do not have
difficulty in accepting the statements of the Representor that he would not
have contemplated making the Trust had he been aware that potential liabilities
of this scale might await him or the Trust.
25. In making this assessment, we record that after
the hearing, we invited further submissions from the Representor on the
potential capital gains tax liabilities and savings, had the sale transactions
gone ahead without the Trust being made.
We made this request because it might have had a bearing on the mindset
of the Representor at the time – if the potential capital gains tax
liability were considerably higher than the potential inheritance tax
liability, then the Court might have concluded that he might have gone ahead
anyway, and that the mistake did not operate on his state of mind and the
actions he took. We are informed
that contract for the sales of land in the UK were exchanged on 4th April
2008. As a result, the proposed
changes to the fiscal regime had not come into effect and there was no CGT
advantage in making the Trust on 5th April, albeit there was a
potential disadvantage in the event that HMRC changed their approach to the
question of his domicile. That
disadvantage is now said to be academic as we are informed that HMRC are out of
time for collection of the CGT that would have been due on the sale of the land
if the Representor had been domiciled in the UK in 2008. However, the additional information now
provided shows that in fact the risks in making the Trust were much higher than
the Representor thought to be the case even at the date of issuing the
Representation. We are satisfied
that, in all the circumstances, the Representor would certainly not have made
the Trust in 2008, had he not been operating under the mistake he was.
26. The third question is whether the mistake was
of so serious a character as to render it unjust on the part of the donee to
retain the property. In the present
case, because the tax is assessable on the Trust as well as on the Representor,
albeit the Trustee is resident in Jersey and there might be difficulties in
enforcement, we do not consider there is any need to distinguish between
measuring justice by reference to the position of the donee or the donor as
discussed In the Matter of the S Trust and In the Matter of the T
Trust [2015] JRC 259. There is
no doubt that the seriousness of the mistake can be analysed by reference to
the effect both on the donor and potentially on the Trustee and the
beneficiaries of the Trust. The
amount of tax due would be very substantial, and potentially catastrophic for
the Representor and his family. If
we were not to make appropriate declarations setting aside the Trust or the transfers
into Trust, there is a real risk of bankruptcy on the part of the Representor
which, given that he is over eighty years old, would undoubtedly be extremely
stressful. Similarly, to embark on
litigation with his English legal advisers in 2008, notwithstanding the
apparently negligent advice which was given, could be long drawn out and
equally stressful. The Law, and the
cases which have been before this Court previously on similar applications,
provide us with a discretion to be exercised and we think this is an
appropriate case in which to exercise it.
27. For these reasons we think it is right to give
relief, and we now turn to the precise nature of the relief which is
sought.
28. Although the Trust was established by a
Declaration of Trust rather than by a Settlement Deed, it was constituted by
payment of £10,000 made by the Representor, as economic settlor, to the
original trustees. Furthermore, it
is right to examine the circumstances in the round, and there is no doubt that
the Declaration of Trust was directly linked to the tax advantages contemplated
in the context of the immediate sale of the land in the UK. Although relief could be justified under
Article 47E, in our view the better course is to look at the establishment of
the Trust itself and to make the declaration under Article 11 of the Law that
the Trust is void ab initio on the grounds of mistake. Pursuant to that declaration, we declare
that any funds or any other assets transferred and/or settled into the Trust
are held on bare trust by the Trustee on behalf of the Representor, and have
been so held at all times.
29. Article 47I (3) of the Law 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.”
30. This paragraph confers a jurisdiction on the
Court to make ancillary orders consequent upon a declaration that transfers
into trust or the exercise of powers in relation to a trust or trust property
were made by mistake. Article 51
confers power on the Court to make orders concerning the execution or the
administration of any trust; and we take this to include the execution or the
administration of a bare trust. In
addition, we think the Court retains its inherent jurisdiction to provide
appropriate remedies consequent upon the exercise of its jurisdiction to grant
relief and that it therefore follows that although Article 11 does not of
itself confer a jurisdiction to make ancillary orders similar to that contained
in Article 47I(iii), the Court nonetheless has jurisdiction to do so for the
reasons given.
31. Accordingly, noting that the Trustee has with
its predecessor trustees acted as Trustee since 2008, it is right to make the
following additional orders. We direct
that the Trustee can retain the remuneration it has already charged and the
reimbursement it has already received for expenses and liabilities reasonably
incurred, and that it can continue to charge its reasonable remuneration and
reimburse itself for all expenses and liabilities reasonably incurred up to the
date of this declaration. We
further direct that the Trustee be relieved from liability in respect of any
and all of its acts and omissions in connection with the bare trust prior to
the date of the order granting the relief other than acts or omissions which
constitute breaches of trust for which the Trustee would have been liable and
in relation to which it would not otherwise have been exonerated or relieved
under the Trust or the general law had the funds and/or shares not been
declared to have been held on bare trust from the date the funds and/or shares
entered the Trust.
32. Judgment is given accordingly.
Authorities
Trusts (Jersey) Law 1984.
Q
v Lutea Trustees Limited and Others [2021]
JRC 166.
In
the matter of the S Trust and the T Trust
[2015] JRC 259.