Jersey Unreported Judgments

Trust - reasons for granting an application for rectification

[2024]JRC133

Royal Court

(Samedi)

14 June 2024

Before     :

M. J. Thompson, Esq., Commissioner, and Jurats Austin-Vautier and Berry

 

IN THE MATTER OF THE REPRESENTATION OF NBK TRUSTEES (JERSEY) LIMITED

AND IN THE MATTER OF THE C TRUST

AND IN THE MATTER OF ARTICLE 51 OF THE TRUSTS (JERSEY) LAW 1984 (AS AMENDED)

Advocate L. Woolrich for the Representor.

judgment

the commissioner:

1.        This judgment contains our reasons for granting an application for rectification bought by NBK Trustees (Jersey) Limited ("the Representor").  The Representor is the current trustee of the C Trust ("the Trust"). 

2.        The application sought rectification of a Deed of Settlement dated 2 March 2017 made between D ("the Settlor") and AUB Trustees (Guernsey) Limited ("the Original Trustee").

3.        The proper law of the Trust is the law of Guernsey.  However, the application for rectification was brought to the Royal Court pursuant to Article 5 of the Trust (Jersey) Law 1984 (as Amended) because the Representor is a Jersey company licenced by the Jersey Financial Services Commission. 

4.        Where an application for rectification is made to the Royal Court by a Jersey resident trustee, while the Royal Court possesses jurisdiction pursuant to Article 5, it also has a discretion to decline jurisdiction.  This could arise where the relevant provisions of the foreign law are not clear and so the application for rectification should be heard by the Courts of the jurisdiction whose law governs the trust (see In the Representation of Barrett and Rathbone Jersey Limited [2001] JLR Note 34).

5.        In this case we were happy to exercise jurisdiction, firstly because all of the beneficiaries notified of the application supported the relief sought by the Representor.  Secondly, we had the benefit of a detailed affidavit of Advocate Natasha Kapp, an advocate of the Royal Court of Guernsey and a partner in Carey Olsen (Guernsey) LLP, on the law of Guernsey which mirrors the law of Jersey, apart from in one respect which we address later in this judgment.

6.        The beneficiaries of the Trust are defined as "the Persons named in the Second Schedule and any other Person added to the class of Beneficiaries pursuant to clause 8 and includes any of them" (see clause 1.3 of the Trust Deed).

7.        The beneficiaries are named in schedule 2 as follows:

(i)        The Settlor's spouse, E;

(ii)       The Settlor's son, F;

(iii)      G;

(iv)     H (now deceased);

(v)      J;

(vi)     K.

8.        The current beneficiaries of the Trust are therefore E, G, F, J and K.

9.        Clause 1.7 of the Trust contained the definition of an Excluded Person as follows. "The Excluded Persons" means any Person excluded as a Beneficiary pursuant to clause 8 and includes any of them;". This clearly does not refer to the Settlor. The power of exclusion contained in Clause 8 was also never exercised by the Original Trustee or the Representor.

10.     The assets of the Trust comprise:

(i)        Property 1 ("the Property"); and

(ii)       Quoted investments and cash.

11.     In support of the application, affidavits were filed by Stephanie Anderson for the Representor, G, Keren Bowen for the Original Trustee, and Christopher Mark Williamson, formerly of TLT, a firm of English solicitors ("TLT"). TLT was instructed by G to provide advice in relation to UK inheritance tax ("IHT") implications of a property holding structure connected to the Settlor. 

12.     The Settlor decided to purchase the Property after the liberation of Kuwait in 1991.  The Property was purchased through an offshore company, Rillington Investments Limited.

13.     Prior to 2016, the Settlor and E would use the Property when they visited the UK.  After 2016, the Property was used by the Settlor's children and their families when they visited the UK.  G deposed that the Property was not let to third parties.

14.     The Settlor was born in 1923.  By 2016 therefore he was 93 years old.  As deposed by G at paragraph 16 of his affidavit, travelling was not easy for the Settlor.  The Settlor also did not speak English and therefore relied on G to translate and liaise with the Settlor's advisers. 

15.     In 2016, G became aware of a new change in UK law regarding an annual tax on dwellings that would create an annual tax charge on properties held through offshore companies known as ATED, together with proposed changes to remove the IHT benefits of owning properties through an offshore company. 

16.     Accordingly, G sought legal advice through TLT for his father. This led to a meeting on 21 October 2016 between Mr Williamson and G in London where they had a discussion.  The fact of this meeting was evidenced by an attendance note of Mr Williamson. 

17.     On 25 October 2016, Mr Williamson emailed Duncan Taylor of the Original Trustee copied to G.  The email included the following statement:

"We discussed the possibility of his father setting up a discretionary trust to hold the shares in the Company. From a UK tax perspective, the shares in the company would need to be transferred to the Trust before 6 April 2017 and his father would need to be excluded from benefit under the trust. Provided this approach is followed, this would not give rise to any UK tax liabilities and the property would be permanently outside G's father's estate for UK inheritance tax purposes." (underlining added)

18.     On 4 November 2016, G forwarded a copy of this email to Duncan Taylor which stated:

"Reference to the advice by Mr. Williamson, we will need to set up a discretionary trust for my father (D) where he would be excluded from benefit under the trust, to hold the shares of Rillington Investment Limited." (underlining added)

19.     On 7 November 2016, Mr Williamson sent two template trust deeds to G with a covering email, which included the following statement:

"Otherwise the trust deeds are on standard terms and I do not have any other specific comments except to emphasise that your father should specifically be excluded as a beneficiary under the Trust for UK inheritance tax purposes." (underlining added)

20.     On 8 November 2016, G emailed Chris Williamson, which email included the following statement:

"my father must be excluded as a beneficiary under the trust for UK ITP."

21.     On 9 November 2016, Mr Williamson emailed Jeremy Mahoney of First Names.  The Original Trustee was part of the First Names group.  This email contained the following statement at paragraph 3:

"Settlor to be excluded as a beneficiary under the trust."

22.     Notwithstanding these documents that refer to the Settlor being excluded, the Trust Deed, although it referred to a power to exclude beneficiaries, did not name the Settlor as an Excluded Person.  Nor did the Original Trustee exercise the power to exclude persons contained in Clause 8 of the Trust Deed to exclude the Settlor.  Rather, the Trust Deed was drafted on the basis that it was sufficient for IHT purposes simply not to name the Settlor as a beneficiary.

23.     The Settlor executed a Letter of Wishes on 5 December 2016 which included the following statement:

"I have set up the Trust for the benefit of my wife. E, and my children F, G, H, J and K and I envisage that the Trust will be used for long term succession planning purposes for them and future generations of my family.

....

My intention is that during my lifetime the property should be held for the benefit and use of my family.

....

1.3 I have named my wife and children as the beneficiaries of the Trust and I would ask that you take into account the needs and wishes of all of the beneficiaries in deciding how to deal with the trust assets."

24.     In other words, the Settlor was recording in his Letter of Wishes which was drafted prior to the Deed of Settlement being executed, that his intention was that the Trust was for the benefit of his wife and children.

25.     On 17 February 2017, the Settlor provided a Letter of Comfort to the Original Trustee about payment of fees and costs, because at that stage the only asset held by the Trust was the Property.  The letter included the following statement:

"Further to the forthcoming changes to the UK tax regime commencing April 2017, specifically with relation to Inheritance Tax I confirm that I have deemed it prudent to obtain tax advice from TLT LLP.

I acknowledge that I have been provided with, and understood a copy of that advice, which details a suggested revision of the existing structure. I acknowledge the existing Company's property will ultimately be owned by a Trust which I shall settle but from which I will derive no benefit."  (underlining added)

26.     It is therefore clear that the Settlor intended that the Trust from which he would "derive no benefit".

27.     The Trust Deed was then executed on 2 March 2017.

28.     The Settlor passed away in 2021.  By this stage, the Original Trustee had retired in favour of the Representor. 

29.     Following the Settlor's death in 2021, the Representor decided to conduct a review of the Trust and sought tax advice from Mercer and Hole LLP.  Mercer and Hole provided tax advice on 3 March 2022, which tax advice was as follows:

"For IHT purposes, if a settlor creates a trust and he retains an interest in the trust then he is treated as having made a 'gift with reservation' (GWR). Retaining an interest in the trust means being a beneficiary of the trust or a potential beneficiary. This also applies if a settlor is not being specifically excluded from benefit under the trust and if the trustees have power to add any beneficiary."

30.     Mercer and Hole also reviewed the Trust Deed and concluded that the settlement of the Property onto the Trust was a gift with a reservation of benefit for the Settlor and therefore the Property, for IHT purposes, could be treated as remaining in the Settlor's estate attracting inheritance tax at 40%.  We were informed that the Property had a value of approximately £3.5 million.  It is therefore clear that the inheritance tax liability would be significant.

31.     We should add that we were also informed that there is some capital gains tax potentially payable, and that the Representor will make appropriate disclosure to HMRC of the capital gains tax payable.

32.     HMRC were also notified of the present application pursuant to an Act of Court dated 9 April 2024.  No response has been received from HMRC by the Representor or any of the beneficiaries.

33.     The problem faced by the Settlor was summarised at paragraph of Ms Bowen's affidavit as follows:

"Due to an omission in the drafting of the Trust Instrument, the Settlor was not expressly named as an Excluded Person, nor was he subsequently declared to be an Excluded Person. It is therefore my understanding that the possibility remained that, during his lifetime, the Settlor could have benefitted from the Trust fund. This is contrary to my understanding of the Settlor's intentions at the relevant time which, it would appear from the correspondence, was that he was to be an Excluded Person from the establishment of the Trust and therefore, never able to benefit from the Trust fund."

34.     Ms Bowen at paragraph 32 and 33 of her affidavit stated as follows:

"32. As far as AUB was concerned it is (and it would seem from the correspondence at the relevant time, always was) their understanding that the Settlor should have been specifically designated as an Excluded Person from the outset. This would appear to be the basis upon which he settled the terms of the Trust and subsequently gifted further assets into it. This is evidenced in the correspondence between AUB and TLT at the time. It is also my understanding and belief (derived from the correspondence between AUB/TLT with the Settlor's son, NAS), that the Settlor always intended that he would be specifically designated as an Excluded Person in the Trust Instrument.

33. It is also clear from the letter of wishes; which was prepared by TLT alongside the Trust and also signed by the Settlor on 5 December 2016 (page 151 of KB-1), that the Trust was set up for the benefit of the Settlor's wife and children and that he envisaged that " ... the Trust will be used for long term succession planning purposes for them and future generations of my family". There is also no reference in the letter of wishes to the Settlor potentially benefitting from the Property at any point."

35.     Mr Williamson in his affidavit at paragraph 3.1 stated as follows:

"3.1 Whilst I cannot speak for the subjective intention of the parties (which is a matter for them), I can record my understanding of their instructions. The purpose of the tax planning was to remove the shares in Rillington Investments Limited (and hence the value of [the property]) from the Settlor's estate prior to a change in IHT law on 6 April 2017. The method by which this was to be achieved was by putting the shares into the trust. The exclusion of the Settlor from the trust was intended to ensure that [the property] would not be treated for the purposes of IHT as a 'gift with reservation', which would otherwise result in [the property] being treated as still being part of the Settlor's estate pursuant to section 102 Finance Act 1986."

36.     At paragraph 3.3, he also noted there was no drafting to expressly exclude the Settlor and then stated as follows:

"I believe the conclusion which I must have reached at the time was that not naming the Settlor as a beneficiary was sufficient to protect his estate from any gift with reservation of benefit argument from HMRC. Had it been understood by any of the professional advisers at the time that specific exclusionary drafting was required to make the position even clearer, then I would have certainly recommended its inclusion and I can see no basis upon which the Settlor would not have agreed to its inclusion."

37.     He also stated the following at paragraph 3.4:

"To the extent that the current drafting does not achieve that purpose, I wholeheartedly endorse the proposed rectification. It was clear to me and, I believe, all advisers at the time, that the purpose of the tax planning was to remove the risk of any IHT liability upon the death of the Settlor."

38.     The understanding of the Settlor by reference to the contemporaneous documents referred to above was also confirmed in the affidavit of G. 

The applicable test under the law of Guernsey

39.     By reference to the affidavit of Advocate Kapp referred to above, the law of Guernsey derives from the principles established as a matter of English law and similar to the principles applied in B and C v Virtue Trustees (Switzerland) AG [2018] JCA 219. 

40.     In The Matter of the OSM Provident Fund [2018] GRC 33, Deputy Bailiff McMahon, in relation to the applicable principles, held that:

"Accordingly, in order to succeed in the claim for rectification of a trust instrument arising from mistake, an applicant must demonstrate that:

(a) there is sufficient evidence that an error has been made so that the document does not carry out the true intention of those involved;

(b) to the highest degree of civil probability, a genuine error has been made;

(c) there has been full and frank disclosure;

(d) there is no other practical remedy; and

(e) there has been no undue delay in seeking relief."

41.     In The Matter of B Trust [2019] GRC 074, Sir Richard Collas Bailiff, referred to the B and C case which he called an elaboration in the test in the OSM decision as follows:

"The conditions which must be satisfied in order for the Court to order rectification of a voluntary settlement are as follows:

1.     There must be convincing proof to counteract the evidence of a different intention represented by the document itself;

2.     There must be a flaw (that is an operative mistake) in the written document such that it does not give effect to the Settlor's intention;

3.     The specific intention of the settlor must be shown; It is not sufficient to show that the settlor did not intend what was recorded; It must also be shown what he did intend; and

4.     There must be an issue capable of being contested between the parties affected by the mistake, notwithstanding that all relevant parties' consent."

42.     Sir Richard Collas also stated at paragraph 16:

"I see no substantive difference between the two expressions of the legal test. The test expressed by the Jersey Court of Appeal [in B and C(ibid)] elaborates somewhat on the test expressed in Guernsey [in The OSM Provident Fund (ibid)] but is not fundamentally different."

43.     The one difference between the law of Guernsey and the law of Jersey follows on from the decision of Deputy Bailiff MacRae in the Representation of Vistra Fiduciary Limited Re The Maria Trust [2022] JRC 164, where Deputy Bailiff MacRae held that the standard of proof in rectification cases was no more than the normal civil burden.

44.     Deputy Bailiff Roland in Guernsey was more cautious and stated the following at paragraph 66 of the Cloudburst Trust [2023] GRC 019 decision:

"66. The learned Deputy Bailiff is right to highlight the importance of the standard of proof being no more than the normal civil burden. Nevertheless, in cases where there is no opposition to the rectification, the Court is often looking back some or even many years to the time of the original intentions, and the evidence is provided by those who can equally be described as having "a lively personal interest in establishing that there was a serious causative mistake", thus the Court needs to be alert to ensure that there is cogent evidence of the facts needed to be found to establish the case for rectification on the balance of probabilities. The Deputy Bailiff directed the Jurats that as with rescission the standard of proof was and remains the balance of probabilities."

45.     The latest authority from Guernsey therefore appears to require cogent evidence of the facts relied upon to show that the written instrument did not reflect the intention of the parties. 

Application of Guernsey law to the facts

46.     In this case, we were satisfied that there was cogent evidence that the Trust Deed did not reflect the true intention of those involved.  The combination of the contemporaneous documents set out in this judgment meant that we were satisfied that both the Settlor and the Original Trustee intended that the Settlor would be permanently and irrevocably excluded from any benefit under the Trust Deed.  We were also satisfied that the intention of transferring the Property from Rillington to the Trust was for inheritance tax purposes.  Those purposes could only be achieved by the Settlor being permanently excluded from any benefit.  To the extent that there is a difference between the law of Guernsey and the law of Jersey in relation to the level of proof required, we were satisfied in this case that the level of proof was met. 

47.     We were further satisfied that there had been full and frank disclosure by the Representor.  As part of that obligation, while we approved the Representor recovering its costs of the application for rectification out of Trust assets as the mistake was not caused by any actions of the Representor, we were informed that the Representor was looking for a contribution to those costs from the Original Trustee and / or TLT.  While that is a matter for the Representor to pursue, it was right that we were informed that the Representor was exploring the recovery of the costs incurred in bringing the application could be recovered.

48.     We were also satisfied there was no other practical remedy in this case.  The threat of pursuing advisers has long been seen as not being a practical remedy to prevent rectification.  In that regard, there is no difference between the law of Guernsey and the law of Jersey.

49.     We were also satisfied there was no undue delay in seeking relief.  Those involved in the matter no longer worked for the Original Trustee.  We appreciate that it always takes a certain amount of time in these sorts of application for evidence to be obtained from former professional service providers where they may have fallen into error. 

50.     Accordingly, we were prepared to grant the present application.  We therefore approved the definition of Excluded Persons being amended to include the words "the Settlor and" in the definition of Excluded Persons in Clause 1.7 of the Trust Instrument, between the words "means" and the words "any person".  The simplicity of the remedy required to correct the mistake itself confirms why we were satisfied that a mistake had been made.  The simpler the drafting required to correct a mistake in the original drafting points towards an error having occurred in addition to the material we have referred to above.

51.     For all these reasons, the application was therefore granted.

Authorities

Trust (Jersey) Law 1984 (as Amended).

In the Representation of Barrett and Rathbone Jersey Limited [2001] JLR Note 34. 

B and C v Virtue Trustees (Switzerland) AG [2018] JCA 219. 

The Matter of the OSM Provident Fund [2018] GRC 33. 

The Matter of B Trust [2019] GRC 074. 

Representation of Vistra Fiduciary Limited Re The Maria Trust [2022] JRC 164. 

Cloudburst Trust [2023] GRC 019.