Before : |
R. J. MacRae Esq., Deputy Bailiff, and Jurats Dulake and Le Heuzé |
IN THE MATTER OF THE REPRESENTATION OF AFFINITY TRUST LIMITED
AND IN THE MATTER OF THE TAMAR TRUST AND THE EXE TRUST
AND IN THE MATTER OF ARTICLE 47H OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)
Advocate O. J. Passmore for the Representor.
judgment
the deputy bailiff:
1. Affinity Trust Limited ("the Trustee") is the Trustee of two Jersey law discretionary trusts known as the Tamar Trust and the Exe Trust (the names of the Trusts have been anonymised for the purposes of publication). We heard the Trustee's representation on 31 July 2023, made orders on that day and now give reasons for our decision. The Tamar Trust was declared on 30 April 2013, and the Exe Trust on 8 May 2013. Both were declared by the original trustee, Pinnacle Trustees Limited ("Pinnacle"). Pinnacle was trustee of both Trusts until it merged with the Trustee on 6 September 2021.
2. The Tamar Trust was settled by X for the benefit of himself and his brother, Y. The Exe Trust was established by Y for the benefit of himself and X. Both X and Y are tax resident but non-domiciled in the United Kingdom. Both are successful restaurateurs [redacted].
3. Prior to becoming UK resident for tax purposes, both took professional tax advice and the legal advice they received recommended setting up offshore trusts, keeping in mind their UK non-domiciled status and reserving the option of relocation to a different part of the world in the future.
4. Both the Tamar Trust and the Exe Trust were settled with £100 and received further assets including unquoted investments in a number of companies, including investments in companies owning restaurants founded by X and Y. Both Trusts also benefit from loans receivable from companies in which the Trustee is a shareholder.
5. The second schedule of each Trust lists the beneficiaries of the Trust; in the case of both the Tamar Trust and the Exe Trust, as X and Y. The Trusts are in identical terms and both contain the same general suite of Trustee powers. Under both trusts there is a default charitable beneficiary, to the extent that upon expiry of the trust period if there are no beneficiaries living then the Trustee may distribute any undistributed capital and income to such charities as the Trustee thinks fit.
6. The Attorney General was, in view of this charitable interest, notified of these proceedings and in view of the remoteness of that interest elected to rest on the wisdom of the Court.
7. HMRC was also notified of these proceedings in view of the potential tax consequences of the relief sought if the Representation was granted, and has asked to be notified of the outcome of this application. Both X and Y have written letters to counsel for the Trustee in support of this application.
8. The application is explained in the affidavit sworn by Justin Thomas on behalf of the Trustee. He has been managing director of the Trustee since 2011 and has worked in the private wealth industry in Jersey for thirty-four years.
9. As noted above, the change of trusteeship occurred in late 2021. Mr Thomas' knowledge of the matter is to a large extent based upon analysis of the Pinnacle files made available to him.
10. Throughout the relevant period, X and Y were given tax advice by an accountancy firm named Hazlems Fenton LLP which was a firm acquired by Blick Rothenberg in November 2018. There is no need to differentiate the two for the purpose of this judgment and accordingly we will simply refer to tax advice which was from time to time received from these firms.
11. At all material times, both Pinnacle and the two Settlors, X and Y, were advised that it was important to ensure that distributions from the two Trusts to X and Y in the United Kingdom were made from the "clean capital" of the Trusts as such distributions would not attract adverse tax consequences for them. Distributions should not be made out of income of the Trusts as such distributions would be subject to income tax in the UK. This tax advice was reiterated on several occasions between 2014 and 2021. It is unnecessary for us to set out the detail of the advice given on each occasion it was given, but such advice was given in 2014, 2015, 2016, 2017, 2018, 2019 (twice) and 2021 (twice).
12. For example, on 10 January 2018, tax advice addressed to Y but copied to Pinnacle and to the tax advisers two hours later by Y, said:
"If the Trusts then distribute any funds to beneficiaries there are a number of possible issues:
(1) If there is a distribution of pure capital, then this should not be taxable;
(2) If there is a distribution of income outside the UK, then this may not be taxable if the beneficiary is taxed on the remittance basis;
(3) If there is a distribution of income outside the UK, then this may be taxable if the beneficiary is taxed on the arising (worldwide) basis.
(4) If there is a distribution of income to the UK, then this will be taxable as this would be UK arising income."
13. At no time during this period were Pinnacle, Y or X informed that there had been a significant change to the relevant tax legislation in the UK, in that from 6 April 2017 distributions made from capital would be matched to the relevant income in the Trusts and would therefore be taxed accordingly, and that the tax regime in the UK, both prior to and following April 2017, was such that distributions of capital from a trust to a beneficiary other than the settlor of the relevant trust was taxable in the hands of the beneficiary if the distribution was remitted to the UK.
14. Between 2017 and 2021, the Trustee of the Tamar Trusts made distributions out of capital to X in the £1,737,000, and distributions to X from the capital of the Exe Trust in the sum of £85,000.
15. As to Y, he, again in reliance on the tax advice received by the Trustee, received distributions of capital from the Exe Trust in the sum of £630,000 by way of distributions made between 2017 and February 2022.
16. Pinnacle / the Trustee only made these distributions because it failed to take into account the changes to the UK tax law that were effective from 6 April 2017, and did not provide for a difference in treatment prior to 2017 between distributions from the capital of the Trust of the Settlor as against distributions from capital of a trust to other beneficiaries. However, the key change was the 2017 change which we have summarised above.
17. The fact that there had been a significant mistake was brought to the Trustee's attention between May and August 2022. The tax adviser advised the Trustee in May 2022 'Trust tax rules are very complicated and have changed many times especially fairly recently when the deemed domicile regime was bought in in 2017'. The alteration in position has been independently confirmed by advice taken by the Trustee from English tax counsel, Oliver Conolly of Pump Court Tax Chambers. Mr Conolly advised:
(i) The arrangements implemented by Pinnacle and the Trustee prior to the 2017 tax change, i.e. the making of distributions to the Settlor from each Trust from capital, were sound and did not give rise to taxable remittances in the UK.
(ii) Following the 2017 tax change, the distributions to X and Y were, for so long as those distributions could be matched to relevant income in the Trusts, subject to income tax regardless of whether they were made from the capital of the Trust; and
(iii) A successful application pursuant to Article 47 of the Trusts (Jersey) Law 1984 (as amended) ("the Law") would have the effect for English purposes of reversing the benefit which X and Y had received as a result of the distributions to them and would thereby retrospectively reverse the income tax charges which would have arisen in the UK.
18. As to 17(c) above, tax counsel said:
"If the s47H application is successful, and it is declared that the amounts that they received were at all times held by them on bare trust for the trustees, it would follow that X and Y will not have enjoyed a benefit for tax purposes. This is in keeping with the effect for UK tax purposes of a successful rescission claim under English law. If a transaction is set aside, the Court is in effect deciding that a transaction of the specified description is not to be treated as having occurred; Pitt v Holt [2013] UKSC26...As a result, the tax effects of the transaction are retrospectively annulled."
19. The tax advisers prepared tax computations for X and Y respectively seeking to quantify the tax due as a consequence of distributions, including late interest and disclosure penalties. The total tax due in the case of X for the tax years ending 2018 to 2021 inclusive, and for Y during the tax years ending 2018 to 2022 inclusive, comes to £1,262,166 in the case of X and £330,853 in the case of Y. These sums are significant.
20. An affidavit has been sworn on behalf of X and Y by Y in which he has said that had they known of the 2017 tax change they would not have made requests to Pinnacle / the Trustee for distributions. Instead they would have asked the trustee to consider advancing loans to them from the Trusts, as proceeding in this way would have had far less adverse tax consequences for them. He says, "We are certain that we would not have sought distributions had we known of the true tax position". We accepted this.
21. Finally, Y goes on to confirm that if the Royal Court grant the relief sought then both he and his brother are in a position and are willing to return the total of the distributions to the Trustee from funds they hold in the UK. The Trustee has independently verified this.
22. For what it is worth, had the Trustee / Pinnacle made loans to X and Y respectively rather than distributions at HMRC's official rate from time to time, then the tax liability would have been £18,480 for X and £3,090 for Y, according to the tax advisers.
23. Accordingly, the Trustee has brought this application asking that the exercise of its power to make the distributions is voidable and of no effect from the time of its exercise pursuant to Article 47H of the Law.
24. Article 47H of the Law provides:
"(2) The court may on the application of any person specified in Article 47I(2), and in the circumstances set out in paragraph (3), declare that the exercise of a power by a trustee or a person exercising a power over, or in relation to a trust, or trust property, is voidable and -
(a) has such effect as the court may determine; or
(b) is of no effect from the time of its exercise.
(3) The circumstances are where, in relation to the exercise of his or her power, the trustee or person exercising a power -
(a) failed to take into account any relevant considerations or took into account irrelevant considerations; and
(a) would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that failure to take into account relevant considerations, or that taking into account of irrelevant considerations.
(4) It does not matter whether or not the circumstances set out in paragraph (3) occurred as a result of any lack of care or other fault on the part of the trustee or person exercising a power, or on the part of any person giving advice in relation to the exercise of the power."
25. It is well-established from case law that it is quite proper for the Court to make orders setting aside distributions where the trustee has failed to take into account the true consequences for its beneficiaries. The Court retains the discretion as to whether or not to grant relief pursuant to Article 47H and will not make an order which it considers to be unjust (see Andha Trust [2023] JRC 080).
26. We are satisfied:
(i) That the Trustee / Pinnacle failed to take into account relevant considerations or took into account irrelevant considerations in this case. In making the distributions, Pinnacle / the Trustee exercised the power given to it under clause 4(ii) of each of the Trusts. Pinnacle / the Trustee did not know that there would be a risk of liability to income tax for X and Y as a result of making distributions because it had seen and relied upon tax advice that was incorrect. There were two distinct aspects, according to the advice from Pump Court Tax Counsel, in which the Trustee failed to take into account relevant considerations concerning the true tax consequences of the distributions. The first affects distributions from both Trusts, namely the failure to take into account that from the date of the 2017 tax change it was no longer the case that distributions could be made from the capital of a trust to its settlor in the UK free of liability to income tax. The second failure to take account of relevant considerations only affects the X distributions from the Exe Trust and arises from the fact that as X was not the Settlor of the Exe Trust and only a beneficiary, the capital distribution regime which existed prior to April 2017 did not apply to the distributions from the Exe Trust to him. The tax advice which the Trustee received did not draw a distinction between capital distributions to settlor beneficiaries and capital distributions to beneficiaries who are not settlors. Accordingly, the Trustee failed to take into account relevant considerations. In not dissimilar circumstances in the Avocado Trust [2021] JRC 171, the Court said at paragraph 27:
"27. In this case the Trustee did follow advice, and this is not a case of the Trustee taking into account irrelevant considerations. However, because the advice that it received was incorrect, it did fail to take into account relevant considerations. Although he was not commenting on the provisions of the Law, the judgment of Lloyd LJ in Sieff -v- Fox [2005] 1 WLR 3811 is of assistance:
114. Looking at the appointment, therefore, it seems to me that, on the part of the trustees, it is vitiated by the failure of the trustees to take into account the true consequences of the appointment as regards capital gains tax, which they failed to take account of because they had been wrongly advised. In my judgment the consequences of the appointment as regards tax (in particular inheritance tax and capital gains tax) were matters which the trustees were under a duty to consider, which they did in fact consider, and to which they failed to give proper consideration because they were provided by their advisers with wrong advice on the point. I find that, if they had had the correct advice, they would not have made the 2001 appointment. Applying the Mettoy test as I have reformulated it above (paragraph 49) I find that the effect of the trustees' exercise of their discretion was different from that which they intended, that they failed to take into account considerations which they ought to have taken into account, and that they would not have acted as they did had they known the correct position as regards the charge to capital gains tax which would result from the appointment."
(ii) It is clear that absent such a failure to take into account relevant considerations Pinnacle / the Trustee would not have exercised the power that it did to make the distributions. That is clear from the affidavit sworn on behalf of the Trustee and from the affidavit sworn on behalf of X and Y.
(iii) We are satisfied that it is just and appropriate to make the orders sought and we declare that the exercises of the power by which Pinnacle / the Trustee made the distributions are voided and of no effect from the time that they were exercised pursuant to Article 47H of the Law.
27. We are also asked to declare and do declare that the distributions have been held on bare trusts by Y and X for the Trustee of each trust with effect from the date of each distribution, which is the consequence of the distributions being declared void.
28. We agree that there is no other practical remedy available in this case. No remedy other than that granted by the Court would have retrospective effect, and the only possible alternative relief available to the Trustee, X and Y would be proceedings arising from the tax advice given in this case.
29. Accordingly, we granted the relief sought and made orders broadly in accordance with the draft order we were invited to consider.
Authorities
Trusts (Jersey) Law 1984.