A judge has ruled that two deeds, signed nearly a decade prior and appointing funds to beneficiaries out of a trust of over £2M, be made void.
In the case of Hopes v Burton , despite the trustees taking professional advice and what they thought to be a “vanilla” course of action, signing the deeds exposed the trust to a tax charge, with interest, of over £400,000.
Trust created in 1992 forgotten for 20 years
Hilary Marsden settled money in a life policy into a trust in 1992. (“Settled” in this context refers to something being put into trust; you may hear trusts referred to interchangeably as “settlements”).
Ms Marsden died in 2004, although, remarkably, her Will’s executors and trustees did not know of the existence of the 1992 trust until late 2012 after a call from the company looking after the money. At that time, the value of the trust fund was over £2M.
Trusts are complicated entities, and there is no specific definition for them. They generally entail a person or persons (trustees) holding something – e.g. money or land – in their name, but for the benefit of someone else (the beneficiary). Commonly, formal deeds and documents are signed when significant actions are taken, such as funds paid out to a beneficiary.
Here, the 1992 trust was what is known as an ‘interest in possession trust’. These typically give someone, called the ‘life tenant’, the right to use the trust property and the right to its income, for their life or a set period, but without outright ownership. The trust document will usually name ‘remainder’ beneficiaries to whom the trust assets will ultimately pass outright when the life tenant dies.
Mistake as to tax consequences
The entirety of the 1992 trust funds were within a policy held with Skandia Life. The trust’s life tenants were four family members, each entitled to 25% of the fund’s income. In 2013, and in assessing needs and individual situations in the family, the trustees decided to appoint some of the trust money from one 25% to a certain beneficiary to assist them in buying a property, and also to change the entitlement of another 25% share. Importantly, they wanted to leave the other two 25% shares exactly as they were. The terms of the trust gave them power and flexibility to do this. Simple enough?
After taking professional advice, deeds were signed, in 2013 and 2014, to bring about these changes. Sadly, it was brought to the trustees’ attention a number of years later that those deeds did not in fact leave two of the shares as they were. Rather, effectively all four of the beneficiaries’ respective 25% funds had been terminated by the deeds and replaced with entirely new ones. Does this really matter? Absolutely. Especially when that risks a tax charge of £365,000 plus over £68,000 of late-payment interest.
This can get complex, but suffice to say that payments into certain types of trust can result in an immediate inheritance tax charge – this is different to the ‘7-year rule’ of gifting you might have heard about. In their actions, the trustees had inadvertently ended the existing trusts, and had effectively created and paid funds into new trusts, incurring tax consequences. Although they had sought advice beforehand, the effects that the deeds of appointment had were unanticipated due to a mistake in the advice given.
Court sets trust deeds aside
Would the trustees have done as they did, had they known of the tax consequences? “Probably not,” you might say – but that question was very important in the court’s decision to ultimately set aside the 2013 and 2014 deeds.
Trustees’ actions cannot simply be reversed because they wish they had not happened – there must have been a serious causal issue, such as fundamental mistake or a breach of duties. Mistake is a recognised concept in law, notably in the case giving rise to the so-called ‘Rule in Hastings-Bass‘. This 1975 case held (as it was thought at the time) a court had power to undo certain decisions made by trustees, if those decisions had unexpected consequences and if the trustees would have acted differently had they considered relevant factors.
The ‘Rule’ has actually been developed since, particularly in 2013 by Pitt v Holt that also involved unforeseen tax consequences on a trust. The judge there decided the Hastings-Bass rule had been wrongly interpreted and that decisions with unintended consequences were not on their own enough. The correct position was, he said, that the trustees must have breached their fiduciary duty (obligation to act in beneficiaries’ best interests) for a court to undo their actions. If trustees made a mistake having taken professional advice that happened to be wrong, that itself was not a breach of fiduciary duty.
So: whilst Ms Marsden’s trustees had acted within their powers, and had not breached their fiduciary duties, they now risked unanticipated and highly adverse tax consequences. They would have been pleased, then, that the judge agreed to set aside the 2013 and 2014 deeds of appointment, on the grounds of mistake. Naturally the judgement explored other complex factors in reaching that decision. A key part of Pitt, though, is that the mistake must be bad enough for it “unconscionable” to remain as it is. The judge recognised that both deeds in Ms Marsden’s trust created “radically different interests” for the beneficiaries from what was intended. It would, he said, have been “unconscionable not to set aside both Appointments.”
Another interesting point to note is that the potential tax consequence were only a risk – HM Revenue & Customs had not made any demand for payment. The fact that the judge set aside the deeds for mistake, though, removed any obligation on the trustees to prove the tax would in fact arise. It was enough that they could show they would not have acted as they did, had the advice they took been sound.
If you are unsure
Needless to say, this can be a minefield, and tax charges can lurk in seemingly innocuous acts in trusts. We strongly suggest trustees obtain professional advice regarding performance of their duties and on the operation of relevant trust law.
Contact one of our experts in our Succession & Tax or Contentious Trusts & Estates teams, if you require advice regarding administration of a trust, your duties and responsibilities as a trustee, or your rights as a trust beneficiary.
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