Before : |
A. R. Binnington, Esq., Commissioner, and Jurats Cornish and Hughes |
IN THE MATTER OF THE REPRESENTATION OF B AND C
AND IN THE MATTER OF THE N FOUNDATION AND THE M TRUST
AND IN THE MATTER OF ARTICLES, 11, 47E AND 51 OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)
Advocate S. J. Williams for the Representors
Advocate E. B. Davies for the Parties Convened, Intertrust Foundation Management (Jersey) Limited (the "Qualified Member") and Hanro Company Limited (the "Trustee") (together, the "Parties Convened")
judgment
IN PRIVATE
the commissioner:
1. This is an application by the Representors, ("B") and his wife, ("C") (together "B and C") seeking declarations that dispositions:
(i) to the Jersey law foundation known as the ("N Foundation"); and
(ii) from the Foundation to the Jersey law trust known as the ("M Trust"), are void or voidable (as applicable) on the ground of mistake as to tax consequences, with consequential relief. If necessary, and for the same reason, they also seek to set aside the Trust itself.
2. In 2009, although B was non-UK domiciled, he had become "deemed" UK domiciled for the purposes of UK inheritance tax ("IHT") as a result of his long-term UK residence. Having generated a significant pool of wealth as a result of his career as an oil trader and with a view to his forthcoming retirement, B wished to seek advice as to the most efficient way in which to structure his affairs in order to minimise the UK IHT burden, whilst also providing for both himself and his wife in his retirement.
3. In his affidavit filed in support of the application B described how he and his wife tried to live within their means and safeguard their wealth for their children. He said that he generally made low-risk investments in assets that he understood, for example classic cars and portfolios with market-leading wealth managers with low to medium risk mandates.
4. B explained that prior to 2009 his bankers, Coutts, would file his self-assessment tax returns but he had not called upon them to arrange any specific tax planning or the tax efficient structuring of his affairs. The possibility of doing so came up for the first time at a social lunch with his advisers at Coutts in mid-2009 when he mentioned that he was approaching retirement and it was then suggested that he should take tax planning advice.
5. The two main concerns that were expressed to B by his bankers, and which would become relevant as result of him becoming deemed domiciled in the UK, were:
(i) reducing his IHT exposure, which would have the benefit of preserving his wealth for his children, this being his primary concern; and
(ii) enabling him to bring foreign funds into the UK without triggering a UK remittance charge. This was regarded as a secondary issue compared to the IHT problem as B was mainly concerned with providing for his children, particularly in the event of the death of both him and his wife.
6. B sought a recommendation as to an appropriate tax expert from his bankers and they suggested that he contact a Dr Colin Masters LLP, ("Masters Tax"), who had previously been their Head of Tax. B's relationship manager at Coutts effected an introduction to Dr Masters.
7. B described how Dr Masters had an impressive CV and at the first meetings with him he felt confident that he was dealing with a very experienced tax specialist. He said that he came across as trustworthy and knowledgeable, with a detailed technical knowledge. B felt reassured that he was getting reliable advice from a top tax specialist who was clearly highly regarded by those who had introduced him.
8. Detailed discussions with Dr Masters about the possibility of creating a tax efficient offshore structure appear to have begun around September 2009. At that time B was considering purchasing two rare classic cars as an investment and wanted to route the purchase through the offshore structure in order to achieve the tax efficiency savings that had been suggested were available.
9. On 22nd September 2009, Dr Masters sent B an email prior to a proposed meeting at the offices of a London-based law firm which provided private client services. In the email Dr Masters explained in some detail why he considered that a Jersey foundation would be the most appropriate structure to achieve B's objectives. He advised that this was because it would offer "enhanced protection from many of the anti-avoidance rules applicable to, for example, companies and trusts". Dr Masters considered that because a foundation did not give rise to fiduciary duties "it is a widely-held view (which I share) that there can be no "settled property" for... inheritance tax provisions". Dr Masters' conclusion was that "the normal inheritance tax charges applicable to trusts do not apply" to Jersey foundations and that "there are a number of ways to avoid (IHT) entry taxation" when transferring assets to Jersey foundations. As to how such a structure would operate in practice, Dr Masters explained that it would need to be created "on the basis of full disclosure to HMRC" and would need to be run by a "reputable and experienced provider" in an offshore jurisdiction.
10. B stated in his affidavit that his understanding at the time was that Dr Masters was advocating the use of a straightforward entity, run by an experienced and reputable provider. Furthermore, he anticipated that he would be providing full and transparent disclosure of the details of this entity to HMRC. He did not consider that Dr Masters was advising him to use an unconventional, or risky, structure.
11. In an opinion subsequently obtained by B from tax counsel for the purpose of this application, to which we shall refer later, the tax planning that was ultimately undertaken was, in counsel's opinion, to be regarded as "highly provocative" and "likely to be attacked by HMRC". B stated that he had absolutely no sense of that possibility in September 2009 and that there was no way that he would have proceeded to establish the Foundation had Dr Masters' proposals been expressed in those terms.
12. B was introduced to representatives of the administration business of Ogier in Jersey, (which has since become Intertrust and to which we shall henceforth describe as such) in around October 2009 and on 20 January 2010 the Foundation was incorporated at the request of B, who was initially the sole beneficiary and guardian. C was added as a further beneficiary of the Foundation on 18 May 2010. The qualified member of the foundation council has at all material times been the Qualified Member.
13. The impetus for establishing the Foundation in January 2010 was, as we have already noted, B's wish to acquire and hold two rare classic cars in a tax efficient manner. Due to some uncertainty about the impact of a new legislative development identified by Masters Tax at that time, they advised that B should make loans to the Foundation initially to fund the purchase of the cars with a view to converting the loans to endowments in due course. B followed that advice.
14. On 21 January 2010, Masters Tax provided a detailed note of advice setting out both the recommended procedure for transferring assets into the Foundation and the IHT treatment of the Foundation. Specifically, it was noted that as B was deemed domiciled in the UK (for IHT purposes) he would be subject to an immediate 20% IHT entry charge on any assets transferred to the Foundation, unless those transfers were "potentially exempt transfers". Masters Tax's advice was that the IHT entry charge could be avoided if B transferred assets to the Foundation by means of a so-called "Reversionary Interest Mechanism", by which:
(a) B would transfer assets to a sub-fund of the Foundation, on terms that required those assets to revert to him after a period of time (in this way, B retained a reversionary interest in the assets, which would not have a high value and as such, the advice was that the transfer would not be regarded as diminishing B's estate in any significant way for IHT purposes);
(b) B would gift the reversionary interest to C (which gift would be free of IHT by virtue of being both a potentially exempt transfer and falling under the normal inter-spouse exemption); and
(c) the Qualified Member would then amend the terms of the sub-fund of the Foundation so as to remove the reversionary interest.
15. Prior to making endowments upon the Foundation, B sought confirmation from Masters Tax that no adverse UK tax consequences would arise. On 24 February 2010, Masters Tax confirmed this to be the case, stating that the documents they had prepared to implement the Reversionary Interest Mechanism were based on transactions and documentation approved by two leading tax counsel. As to the question of whether the Foundation could be treated as a trust for IHT purposes, Masters Tax reiterated the view that it could not and concluded that, in the context of any potential IHT charges arising on the endowments, any perceived uncertainty about this was irrelevant as it was avoided by the Reversionary Interest Mechanism.
16. In reliance upon that advice, in March 2010 B began to transfer assets to the Foundation by way of the Reversionary Interest Mechanism, and continued to do so until May 2013. The initial loans were also converted to endowments in March 2010. C stated in her affidavit that she relied on the professional advice that her husband had received from Masters Tax in participating in the Reversionary Interest Mechanism. Evidence filed on behalf of Intertrust confirmed that Ogier were similarly relying on the advice given by Masters Tax.
17. During this period a number of endowments were made which did not make use of the Reversionary Interest Mechanism. Some of these were oversights that were identified to B shortly afterwards by Intertrust and then, on advice from Ogier law firm and Masters Tax, documentation was deployed to correct the position retrospectively. On other occasions, endowments were made without using the Reversionary Interest Mechanism because they were intended to meet the Foundation's costs and expenses.
18. B's use of the Foundation changed materially in mid-2013, due to advice that he received in relation to the introduction of the General Anti-Abuse Rule ("GAAR") which came into force with the Finance Act 2013. Masters Tax advised that HMRC would seek to use the GAAR to prevent assets being transferred to the Foundation by way of the Reversionary Interest Mechanism (but advised that it would not cause any issue from an IHT perspective if endowments were made in order to meet the costs and expenses of the Foundation). From 2014 onwards, B therefore made endowments intended for that purpose, rather than by way of further investment.
19. From late 2013 to mid-2018, Masters Tax conducted periodic reviews of the tax planning arrangements and reiterated previous advice in relation to the Foundation, confirming the appropriateness and tax efficacy of the structure. As on previous occasions, it was said that their analysis was supported by the views of leading tax counsel, but it has now become apparent that in fact no advice had ever been sought in relation to this specific structure. Masters Tax also conducted a review of the Foundation structure in the context of the introduction of the "Requirement to correct" regime, which required taxpayers with previously undeclared tax liabilities in respect of certain "offshore interests" to correct their position by reporting this to HMRC on or before 30 September 2018, or face penalties. Masters Tax provided advice dated 28 August 2018 that repeated previous advice and confirmed that the assets in the Foundation should not be subject to IHT anniversary and exit charges and again suggested that their advice had the endorsement of leading tax counsel.
20. In February 2011, B and C decided to acquire a new family home in the UK ("the Property"). On 11 March 2011, the Foundation acquired the entire issued share capital of ("Company A), the company which held the title to the Property. Masters Tax provided advice in connection with the structuring of the transaction to acquire (Company A).
21. In January 2013, the ownership structure of the Property was considered in the context of the Annual Tax on Enveloped Dwellings ("ATED") which had recently been introduced and which would become payable in respect to the Property. On 1 February 2013 Masters Tax advised that, in order to take it outside of the scope of ATED, it would be necessary to liquidate Company A, transfer the Property into the Foundation and subsequently transfer it to a new trust, before the coming into force of the ATED in April 2013. Dr Masters advised that the proposed transfer would neither be regarded as a chargeable transfer, nor would it generate an IHT exit charge (at 6% of the value of the Property) as the Foundation would not be a "settlement" for IHT purposes. However, it was noted that once held in trust, the Property would be subject to a 10-yearly IHT anniversary charge, at 6% of the value of the Property, this in addition to an equivalent IHT exit charge should it ever leave the Trust. However, it was further advised that some specific steps could be taken to mitigate or eliminate the IHT charges.
22. Both the Qualified Member and B were happy to proceed with the proposed transfer in reliance on that advice. On 22 March 2013, Masters Tax suggested two possible transfer options. B ultimately opted to proceed by way of the more straightforward route, by which Company A was liquidated and the Property distributed to the Foundation, which in turn transferred it to the Trust, albeit that this was the slower route and led to some ATED being incurred in the short term.
23. On 25 June 2013, the Trust was established with initial property of £10 such monies being paid from the assets of the Foundation.
24. Shortly before the liquidation of Company A, on 20 September 2013, Dr Masters confirmed that his tax advice regarding the proposed transfer was correct and expressed his view that GAAR would not apply to the proposed transfer as it would complete before the GAAR came into operation. Beneficial ownership of the Property was settled onto the Trust for B's benefit (as a beneficiary of the Foundation) pursuant to a Deed of Appointment and Indemnity between the Foundation and the Trustee dated 27 September 2013.
25. From 27 September 2013 to date, legal title to the Property has been held by the Trustee as the main asset of the Trust. B and C have lived there for the duration of that time. The Trust has served no other purpose aside from holding the Property and the Trustee has not entered into any subsequent transactions.
26. In accordance with advice, B disclosed details of the Foundation (and, where applicable, the Trust) in his self-assessment tax returns each year (with the exception of tax year 6 April 2017 to 5 April 2018, B understands, by virtue of an oversight on the part of his professional tax agents). However, he never submitted any IHT accounts to HMRC, having been advised that there was no IHT due on the transfers to the Foundation or the assets it held.
27. The principal of Masters Tax, Dr Masters, retired in 2019. Subsequently, B took advice from Stephenson Harwood LLP who were instructed to review matters. In June 2021 they advised that, contrary to the advice from Masters Tax:
(a) the Reversionary Interest Mechanism would not enable assets/funds to be transferred into the Foundation without triggering any IHT entry charges;
(b) the Foundation would be treated as a "settlement" for IHT purposes and would therefore attract anniversary and exit charges on its relevant assets;
(c) as a result of the Foundation's status as a "settlement" for IHT purposes, the steps suggested by Masters Tax and taken to mitigate or eliminate any IHT anniversary or exit charges on the assets held in the Trust would not be effective. Accordingly, there would be a 10-year anniversary charge on the value of the Property held within the Trust which would have fallen due on 21 January 2020; and
(d) monies paid to the Foundation to meet its running costs after the introduction of the GAAR were also likely to have triggered IHT entry charges.
28. The conclusions reached by Stephenson Harwood were confirmed by specialist tax counsel, Mr Barrie Akin. In short, Mr Akin stated that he would not have advised B to establish the Foundation or make the endowments via the Reversionary Interest Mechanism as it was "highly provocative" tax planning in an area of uncertainty that would have been highly likely to have been attacked by HMRC, with the risk of years of associated litigation. Mr Akin did not consider that Masters Tax drew B's attention to these risks at the time, or provided any evaluation of the level of risk. Mr Akin concluded that there was a material risk that HMRC would seek to impose liability on B. It was a serious risk that for IHT purposes the Foundation would be regarded as a "settlement" and a risk that each use of the Reversionary Interest Mechanism amounted to a lifetime chargeable transfer. As B was a beneficiary of the Foundation at all material times, the "gift with reservation" provisions of the Finance Act 1986 would also apply. Any direct transfers to the Foundation would also be a lifetime chargeable transfer, including contributions to meet running costs which were entirely gratuitous.
29. Mr Akin advised that given the likely status of the Foundation as a "settlement" the "single settlement fiction" would apply to the Trust. This applies when property is transferred from one settlement to another and has the effect of treating the property transferred to the Trust as remaining in the Foundation for the purposes of the charges applicable to relevant property trusts. The effect of the single settlement fiction in this case would be that the 10-year anniversary of all the property within the Foundation and the Trust would fall 10 years after the creation of the Trust, i.e. on 20 January 2020. The Masters Tax advice had been that in respect of the property held within the Foundation, the 10 years would run from the date of the creation of the Trust, giving time to consider methods by which the relevant tax could be mitigated.
30. In Mr Akin's opinion the following IHT liabilities potentially arise:
(a) IHT entry charges on each endowment to the Foundation made using the Reversionary Interest Mechanism (approximately £3.5 million);
(b) IHT 10-year anniversary charges on the assets of: i) the Foundation and ii) the Trust both of which fell due on 20 January 2020. This charge would be for between approximately £636,000 and £1.27 million depending on what the effective rate of IHT is calculated to be; and
(c) IHT exit charges for any transfers of assets out of the Foundation and the Trust (although, in respect of the Trust, there have been no such transfers to date).
31. The Representation was first presented to the Royal Court on 9 June 2023 at which stage the proceedings were ordered to be held in private and the Foundation and Trustee were convened as interested parties.
32. The Court further ordered that HMRC be notified of the application and hearing date, should it wish to be convened or make submissions, and the Representors were ordered to provide HMRC with a copy of the Representation and Act of Court dated 9 June 2023. Notification on that basis was made by letter dated 14 June 2023 from B's English solicitors.
33. By letter dated 6 July 2023 HMRC responded, acknowledging receipt of the letter of 14 June 2023 and confirming that HMRC did not have any comments to make on the application. They did however request a copy of the court order and any judgment issued in due course.
34. Advocate Williams, for the Representors, identified the three separate jurisdictional gateways relevant to this application:
(a) the court's inherent power to set aside voluntary dispositions to a Jersey law foundation on the basis of mistake;
(b) the court's statutory power pursuant to article 11 of the Trusts (Jersey) Law 1984 ("the 1984 Law") to set aside a Jersey law trust established on the basis of mistake; and
(c) the court's statutory power pursuant to article 47E of the 1984 Law to set aside transfers or dispositions to a Jersey law trust in circumstances where the relevant power was exercised on the basis of a mistake.
35. He noted, and we agree, that all three jurisdictions are exercised at the discretion of the court in the light of the relevant circumstances.
36. The operative mistakes relied upon by the Representors were identified in the Representation as follows:
(i) At all material times prior to 18 June 2021, being the date on which B first came to understand that the relevant advice from Masters Tax was incorrect, B was operating under a mistake in believing that the creation and use of the Foundation was a suitable vehicle for the mitigation of the IHT charges.
(ii) Further, at all material times prior to 18 June 2021, B was operating under a mistake in believing that there was no realistic possibility of the IHT charges arising as a result of:
(a) transferring assets to the Foundation either by way of the Reversionary Interest Mechanism or generally;
(b) transferring money to the Foundation to meet its running costs;
(c) causing the Trust to be established; and
(d) causing assets to be transferred to the Trust from the Foundation as an appointment for his benefit (or, if any IHT charges did arise as a result of taking these steps, that such IHT charges could be mitigated to or eliminated).
37. In relation to C, it was alleged that at all material times prior to 18 June 2021 C was operating under a mistake in believing that her involvement in the implementation of the Reversionary Interest Mechanism was necessary (and effective) for the mitigation of the IHT charges.
38. The leading, and only, Jersey case relating to mistake as it applies to Jersey law foundations is the decision of the Royal Court (Clyde-Smith, Commissioner) in B v C and Seven Others [2020] (2) JLR 304. The Representors in that case sought the setting aside of a foundation ab initio on the ground of mistake. The foundation was established under the Foundations (Jersey) Law 2009 ("the 2009 Law") following tax advice, which turned out to be incorrect. The Representors acknowledged that there was no express power under the 2009 Law equivalent to Article 11 of the 1984 Law which provided that a trust would be invalid to the extent that the court declared that it was established by, inter alia, mistake. However, they submitted that a power to declare a foundation invalid on the grounds of mistake could be implied into the 2009 Law. The court disagreed, noting that there is a fundamental difference between a foundation and a trust, the former being a legal entity whilst the latter is not. Where a trust is declared invalid under Article 11 no issue arises as to the application of the trust property held by the trustee as the assets remain owned by the trustee on bare trust and can be returned to the person(s) having transferred them into the trust. A foundation, as a legal entity, owns its own assets and, if set aside ab initio, there would be no entity able to transfer the assets back to those who had endowed it. The court did however accept that it could set aside the endowments made to the foundation by the Representors on the conventional application of the Jersey law of mistake.
39. In B v C the court noted that the law in Jersey as to the ability of the courts to set aside voluntary dispositions on the grounds of mistake was well established. The court held that although the case law was concerned in the main with voluntary dispositions into trusts, the law was of general application to other dispositions and would apply to dispositions by the Representors to the foundation in the instant case.
40. The relevant test, which the Court adopted, was set out in In the Matter of the A Trust [2009] JLR 447 and then subsequently reformulated into a three-stage test in Re Lochmore Trust [2010] JRC 068, the test having been applied in a number of subsequent cases. The test requires the court to ask itself the following questions:
(i) Was there a mistake on the part of the donor?
(ii) Would the donor 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?
41. Article 11 of the 1984 Law provides that a trust shall be valid and enforceable in accordance with its terms save to the extent that, inter alia, the court declares, pursuant to Article 11(2)(b)(i) that it "was established by duress, fraud, mistake, undue influence or misrepresentation or in breach of fiduciary duty".
42. Article 11 of the 1984 Law is, in its terms, dealing with an application to set aside the establishing of a trust as a whole rather than dispositions into it. However, the Royal Court noted in Re S Trust and T Trust [2015] JRC 259, at paragraph 17, that:
"Sometimes it might be said that a trust is valid and that the settlor 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 the 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."
43. In Re the R Trust, S Trust, T Trust and U Trust [2021] JRC 166, at paragraphs 18 and 19, the Court referred to the interplay between Articles 11 and 47E of the 1984 Law as follows:
"18. The Court's jurisdiction under the Trusts (Jersey) Law 1984 (the Trusts Law") is engaged in two ways:
(i) Under Article 11, the trusts can be declared invalid to the extent that they were established by mistake. To the extent held invalid, then pursuant to Article 11(6) the property shall be held for the settlor absolutely or if dead, for his or her personal representatives.
(ii) Under Article 47E the Court can declare a transfer or other disposition of property to a trust voidable and having such effect as the court may determine or having no effect from the time of its exercise. Pursuant to Article 47E(3) the circumstance in which such declaration can be made is where the settlor made a mistake in relation to the transfer or other disposition of property to a trust, 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 the declaration.
19. As the court said in the case of In the Matter of L Trust [2019] JRC 195, citing In the Matter of the S Trust and In the Matter of the T Trust [2015] JRC 259, the following are points of broad application:
(i) Article 11 of the Trusts Law relates to the invalidity of the trust as a whole;
(ii) In so far as transfers which were subject to the application included the transfer which immediately constituted the trust, Article 11 would seem to apply.
(iii) In so far as the transfer is made to an existing trust, Article 47E would apply.
(iv) For the purposes of Article 11 and 47E, it does not matter whether the asserted mistake was of fact or law, as to the effect or as to consequences. Accordingly, a mistake as to the tax consequences of a trust or transfer to a trust is a mistake for these purposes."
44. Factors that have been taken into account by the courts when the mistake is one as to the tax consequences of the transaction have included matters such as the degree of certainty around the tax advice, what the donor or settlor appreciated about the tax consequences and the donor or settlor's attitude to risk. In relation to the latter the Royal Court stated, in Representation of A re the E Settlement [2022] JRC052, at paragraph 17, 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 advisors probably do."
45. The second question to be answered by the Court is "Would the donor not have entered into the transaction "but for" the mistake?".
46. In In Re R Trust, S Trust, T Trust and U Trust (supra) at paragraph 39 the Court held that this is a "purely factual question".
47. Advocate Williams suggested that whilst, for practical purposes, the Courts have frequently tested this point by means of an evaluation of whether the donor would or would not have made the disposition had they grasped the true, as opposed to mistaken, consequences of doing so the danger of such an approach was that it elided the "but for" test, which goes to causation, with an assessment of the seriousness of the consequences, and might lead the court to consider counterfactuals as to which it may be forced to speculate. He therefore submitted that the preferable legal approach for the court is to determine whether the donor entered into the transaction "in reliance" on the mistake in question. In our view there is little to be gained by attempting to refine a test which has been applied without difficulty by the courts. What is important is the causative nature of the mistake which the "but for" formulation adequately describes.
48. In Re R Trust, S Trust, T Trust and U Trust (supra), at paragraph 42, the Court noted the following applicable principles:
(i) The Court must first ask whether the mistake is of a serious character and then ask whether it is just for the Court to make the declaration.
(ii) The seriousness of the mistake can be analysed by reference to the effect both on the transferor and potentially on the trustees and beneficiaries of the trust.
(iii) As to the questions of justice... the Court might not step in to relieve settlors of the consequences of artificial or aggressive tax avoidance which has gone wrong.
49. The comments made in Representation of A re the E Settlement (supra) to which we have already regarded are an obvious application of the third principle under this head. The courts have on occasion considered whether the seriousness of the mistake, or rather the loss caused by it, could be mitigated by a claim in negligence against an adviser who gave the original tax advice. For example, in Re Onorati Settlement [2013] (2) JLR 324, (which concerned the Hastings Bass principle rather than the law of mistake) the court said:
"More generally, we are not attracted by the proposition that beneficiaries should be left to a remedy of bringing litigation against the trustees or professional advisors. The beneficiaries are usually not at fault and have already incurred loss by reason of unnecessary tax charges. To force them to incur further expense in what may be uncertain litigation when the law allows for the avoidance of a decision made in breach of the trustees' duties seems unnecessary, undesirable and unjust."
50. Although delay is also a potential ground for refusing relief (see Re R Trust, S Trust, T Trust and U Trust (supra) at paragraph 49) we do not regard the period of two years between the identification of the incorrect advice and the issue of the Representation as being sufficient to justify the refusal of the relief sought. B accepted in his affidavit that there were some delays in obtaining the full suite of contemporaneous documents which had to be reviewed before proceeding but it was necessary to collate and review evidence stretching back around fourteen years in order to take the necessary detailed advice.
51. The Foundation was entirely endowed by assets transferred by B. The creation of the Foundation and its subsequent endowment were entirely the result of tax-planning advice given by Masters Tax, which turned out to be wholly incorrect. We are satisfied that a mistake was made by B in relying on that advice and endowing the Foundation.
52. We have noted that B described himself to be cautious and risk averse when making investments and we have no reason to believe that this is not the case. Furthermore, he sought professional advice on the structuring of his affairs for tax purposes and sought recommendations as to an appropriate adviser from his bankers, who he trusted. It would appear that there was nothing to put him on notice that Dr Masters was anything other than a highly experienced professional and it appears that he was comforted by Dr Masters' repeated representations that the advice that he was giving was in accordance with advice given by leading tax counsel. What ultimately became clear was that Dr Masters did not seek advice on this specific transaction from leading tax counsel but instead appears merely to relied on generic advice or advice given in relation to other transactions. It is, however, clear that B was unaware of this at the relevant time.
53. We accept that B relied completely upon the advice that he was given and that had he been aware that he was entering into a high risk and provocative transaction that was highly unlikely to have provided the tax mitigation that he sought he would not have done so. Accordingly, we are satisfied that he would not have made the endowments to the Foundation but for his mistake.
54. It is the answer to this question that has given the Court the most difficulty.
55. There is no doubt that the mistake was of a serious nature. The purpose of the creation of the Foundation and its endowment was to mitigate the impact of UK IHT on B as he approached retirement and, in consequence, to mitigate its impact on his family, for whom he wished to provide. The impact of the mistake is significant, potentially involving the payment of tax, interest and penalties in excess of £5 million.
56. The aspect of the test that has most troubled the Court is whether in the circumstances it is unjust on the part of the donee, namely the Foundation, to retain the funds paid by way of endowment. If the endowments are not set aside then at the very least there is likely to be a lengthy and costly process to determine whether the structure was effective in its objective. If, as seems likely, the Foundation is unsuccessful in that process then significant amounts of UK tax are likely to be payable. However, at a time when a large proportion of the UK population are struggling financially and are dependent on state support the ability of wealthier individuals to use complex schemes to reduce the amount of UK tax that they pay may seem unjust. HMRC nevertheless has at its disposal an array of legislation and remedies to counter aggressive tax schemes and we accept that most advisers are now well aware of the limits of acceptable tax mitigation. Furthermore, the Court retains a discretion to refuse relief in cases where it is of the view that justice requires the relevant transaction to be upheld rather than avoided.
57. B was a very successful oil trader and might therefore have been in a better position to question the advice that he was being given than, say, a less sophisticated individual. However, on balance, the Court accepts that skill in trading oil does not translate into skill in understanding the finer points of inheritance tax legislation. There is no evidence that B was anything other than cautious and risk averse and it is clear that he placed himself in the hands of advisers recommended to him by persons that he trusted and who he regarded as experienced and competent. He was reassured that the structures were disclosed to HMRC and that the advice that he had been given by Masters Tax had been confirmed by leading tax counsel.
58. In relation to alternative remedies there is little prospect of taking action against the advisers for any loss suffered, Masters Tax having now ceased to exist.
59. We accordingly found that the mistake was of so serious a character as to render it unjust on the part of the donee to retain the property. We therefore ordered that the endowments made into the Foundation (more particularly described in the Representation) be set aside and declared void ab initio and of no effect. The assets transferred to the Foundation were accordingly held at all material times on bare trust for B.
60. The Trust was settled and funded by the Foundation in accordance with the advice from Masters Tax and it is clear that at the time both B and Ogier (as was) were relying on that advice. An initial trust fund of £10 was provided by the Foundation and the Foundation subsequently transferred the Property to the Trust. Both the initial trust fund and the Property were derived from endowments made by B. In the light of our finding in relation to the endowments the Foundation did not have the power to settle the funds on the Trust and the transfers to the Trust were of no effect. Accordingly, they are set aside ab initio. It follows that the Trust was never properly constituted, given the want of subject matter and is therefore set aside ab initio. The assets purportedly held by the Trustee were thus at all material times held on bare trust for B. Given that finding there is no need for us to go on to consider the alternative relief sought by the Representors whereby they sought a declaration that the transfers to the Trust were voidable and liable to be set aside for mistake.
61. In relation to sums paid to the Parties Convened or to Intertrust by way of fees and expenses we were told that B did not seek to undermine the retention by the Trustee, Qualified Member, or by Intertrust of any remuneration received or the expenses and liabilities that were paid by the Foundation from the Endowments at the time when it was believed the Endowments and the establishment of the Trust were valid. The Endowments which funded those payments having been set aside, the consequence is that the funds would have at all times been held for B absolutely. As the payments were made with B's knowledge and consent, they can be considered to have been made with his authority and we note that he has accepted that the receiving parties have no liability to restore them.
62. As requested by HMRC we authorise the Representors, notwithstanding that the hearing was held in private, to disclose to HMRC a copy of the Act of Court and a copy of this judgment.
Authorities
Trusts (Jersey) Law 1984 (As Amended).
B v C and Seven Others [2020] (2) JLR 304.
Foundations (Jersey) Law 2009.
In the Matter of the A Trust [2009] JLR 447.
Re Lochmore Trust [2010] JRC 068.
Re S Trust and T Trust [2015] JRC 259.
Re the R Trust, S Trust, T Trust and U Trust [2021] JRC 166.
Representation of A re the E Settlement [2022] JRC052.
Re Onorati Settlement [2013] (2) JLR 324.