Before : |
Sir Michael Birt, Commissioner, and Jurats Christensen MBE and Opfermann |
Between |
Equiom (CI) Limited |
Representor |
And |
(1) The Widow |
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(2) The Husband |
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And |
(3) Child A |
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(4) Child B |
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(5) Grandchild A |
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(6) Grandchild B |
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(7) Grandchild C |
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(8) Advocate Damian Evans as guardian ad litem of the unborn beneficiaries |
Respondents |
IN THE MATTER OF THE CAPITAL TRUST
Advocate B. Lincoln for the Representor.
Advocate D. Evans in person.
The remaining Respondents did not appear and were not represented.
judgment
the commissioner:
1. In this case, the Representor applies under Article 47G(2) of the Trusts (Jersey) Law 1984 ("the Law") for a declaration that a deed of appointment dated 2 October 2009 ("the 2009 Appointment") is voidable on the ground of mistake and is set aside and of no effect since the time of its execution. At the conclusion of the hearing, the court granted the relief sought. What follows constitutes our reasons for that decision.
2. The Capital Trust ("the Trust") was established by the settlor ("the Settlor") by deed dated 16 March 1987. Although initially governed by the law of England and Wales, the proper law of the Trust was changed to Jersey law on 12 March 1996 and that has remained the position since then. The Trust is also administered in Jersey.
3. Key Trust Company Limited ("KTC"), a Jersey company which carried on trust company business, was appointed as trustee on 25 April 2007 and remained as trustee until 27 June 2014, when it was replaced by Vivat Trustees Limited ("Vivat"). Vivat merged with the Equiom Group in December 2016, following which Vivat ceased to exist as a separate company and the Representor became trustee, albeit that in law the Representor has been the trustee since Vivat's appointment in June 2014.
4. Clause 2(a) of the trust deed conferred a life interest in the income of the Trust upon the Settlor and, following his death, a successor life interest in the income upon his then wife, to whom we shall refer as "the Widow". Following the death of the Widow, the income was to be held on discretionary trusts for the benefit of the class of beneficiaries. Clause 3 of the trust deed contained various overriding powers of appointment.
5. As stated, at the time of the creation of the Trust, the Settlor was married to the Widow. They had two children ("the Children") and between them, the Children have three children who are therefore the grandchildren of the Settlor ("the Grandchildren"). Under the terms of the Trust, the class of beneficiaries comprises the Widow, the Children and any wife, husband, widow or widower or any child or remoter issue of the Widow or the Children. At present, the Children are revocably excluded as beneficiaries although it is anticipated that in due course they may well be reappointed.
6. The Settlor died in 1987. The Widow survived him and accordingly had a life interest in the income of the Trust. She has subsequently remarried, and we shall refer to her husband as "the Husband".
7. By deed dated 3 September 1997 ("the 1997 Appointment"), the then trustee and protector exercised the power under Clause 3(a) to vary the terms of the Trust by conferring a power on the Widow to appoint a successor life interest in the income to any husband who survived her.
8. In November 2022, the Representor sought advice on an unrelated matter from Burges Salmon LLP ("Burges Salmon"), English solicitors. On reviewing the documentation of the Trust, Burges Salmon identified the issue relating to the 2009 Appointment which has given rise to this application. Thereafter, the Representor, which was not the trustee at the time of the 2009 Appointment, had to investigate the matter at some length. This was not assisted by the fact that KTC had ceased to exist following its merger with another trust company. The results of the investigation are set out in the affidavit evidence which is before us and which we accept.
9. At the time of the 2009 Appointment, Mr Paul Bramall of BDO Stoy Hayward LLP ("BDO") was a UK tax adviser to the Widow and to KTC as trustee of the Trust. In 2008, Mr Bramall undertook a review of the Trust as part of the Widow's inheritance tax ("IHT") planning. Following this review, he wrote to the Widow in September 2008 making a number of recommendations. The key proposal was the appointment to the Husband of a successor life interest in the Trust income should the Widow predecease him. Mr Bramall's advice was that this would defer the IHT liability that would otherwise arise on the Widow's death until the death of the Husband.
10. In the course of considering how to put Mr Bramall's recommendations into effect, KTC asked Mr Bramall to consider whether the Widow could exercise her power under the 1997 Appointment to appoint a life interest to the Husband after her death. However, by email dated 23 September 2008, Mr Bramall opined that this would not be appropriate because he considered that the trust deed itself had to contain the successor life interest. He suggested therefore that KTC as trustee should exercise its power to create the successor life interest. According to Burges Salmon, this advice was incorrect and the successor life interest could have been created by the exercise of the Widow's power under the 1997 Appointment.
11. Be that as it may, in due course KTC instructed the firm of Collas Crill LLP (then known as Crill Canavan) to prepare a deed whereby the trustee would appoint a successor life interest to the Husband. The deed prepared by Collas Crill was then sent to Mr Bramall for approval and he confirmed that it was "just right" and that it achieved "exactly what we want".
12. By the terms of the 2009 Appointment, KTC as trustee specifically revoked the existing Clause 2(a) and substituted it with a new Clause 2(a) as set out in the schedule to the 2009 Appointment. The new Clause 2(a) was identical to the previous one, save that it inserted a life interest in favour of the Husband to take effect between the death of the Widow and the discretionary trust in favour of the class of beneficiaries.
13. Following Mr Bramall's confirmation that the draft deed was in order, the protector signed the 2009 Appointment on 13 November 2008. For reasons which are not clear, KTC did not execute the deed until 2 October 2009 and that was therefore the date upon which it came into effect.
14. As stated, the effect of the 2009 Appointment was that the existing Clause 2(a) trusts were terminated and the amended Clause 2(a) trusts were created on 2 October 2009. The termination of the original Clause 2(a) trusts is the mistake which was made in this case.
15. In 2006, significant reforms of the United Kingdom IHT rules applicable to trusts were enacted by the Finance Act 2006. So far as relevant to this application, the changes were as follows.
16. Prior to 22 March 2006, all life interest trusts were effectively "transparent" for IHT purposes with the result that trust property was treated as though it belonged to the beneficiary with the life interest. Accordingly, upon that beneficiary's death, the trust fund would be aggregated with the beneficiary's free estate and the trustees would be responsible for paying their respective share of the total amount of IHT due. Accordingly, in relation to the Trust, upon the Widow's death, a charge to IHT at 40% would have arisen on the value of the Trust fund, subject to any nil-rate band. Furthermore, an important benefit was that, for the purposes of capital gains tax, there would have been a tax-free rebasing of the trust fund to current market value as at the date of the Widow's death.
17. The new regime taking effect from 22 March 2006 had the following characteristics:
(i) Trusts created after that date were taxed as "relevant property" settlements under the Inheritance Tax Act 1984. The tax treatment ("the RP Regime") applicable to such trusts was very different.
(ii) On entering the RP Regime, there is an immediate charge to IHT at 20% of the value of the trust fund, subject to any available nil-rate band.
(iii) While in the RP Regime, the trust fund is subject to IHT charges every ten years at a rate of up to 6% ("the 10-year charges").
(iv) Charges also apply when capital leaves the trust, at a rate based on the rate as at the date of the previous 10-year charge but pro-rated to take account of the time which has passed since then.
(v) Interests in possession only qualified for the pre-2006 tax treatment if they met strict criteria for a "qualifying interest in possession" ("QIIP"). Crucially, a QIIP had to exist before 22 March 2006.
18. Before the 2009 Appointment, the tax treatment of the Trust was as follows:
(i) Under the terms of the original trust deed, the Widow had an interest in possession in the income of the Trust. She was (and remains) domiciled in England and is therefore subject to IHT on her worldwide estate.
(ii) A charge to IHT would therefore have arisen on the value of the trust fund (subject to any nil-rate band) on the Widow's death at 40%.
(iii) In the event that capital was paid from the Trust to any other individual, the payment would have been a "potentially exempt transfer" by the Widow, subject to the 7-year rule.
(iv) There would have been a tax-free rebasing of the trust fund to current market value on the death of the Widow for the purposes of capital gains tax.
19. Between 22 March 2006 and the date of the 2009 Appointment, the Widow's interest in possession in the Trust qualified as a QIIP (since it existed pre-2006) and so continued to enjoy the same tax treatment as it had done before the reforms brought in by the Finance Act 2006.
20. After, and in consequence of, the 2009 Appointment, the position was as follows:
(i) The Widow's new interest in possession created by the 2009 Appointment does not qualify as a QIIP and accordingly falls within the RP Regime.
(ii) On the Trust entering the RP Regime (2 October 2009 upon execution of the 2009 Appointment), there was an immediate charge to IHT at 20% of the value of the trust fund, subject to any available nil-rate band.
(iii) Since no account has been submitted to HMRC in relation to the above, interest is accruing on the above charge (which may also attract late payment penalties).
(iv) While in the RP Regime, the Trust is subject to IHT charges every ten years at a rate of up to 6%. The starting date for the 10-year charges in this instance was the date of the 2009 Appointment and therefore the first 10-year charge arose in 2019.
(v) Since no account has been submitted to HMRC in relation to the above, interest is accruing on the above charge (which may also attract late payment penalties).
(vi) The Widow is also treated as having made a "gift with reservation of benefit" for IHT purposes. The effect is that, unless and until she gives up her life interest, the Trust fund is still treated as remaining in her estate. Accordingly, the same IHT charges will arise on her death as previously applied (namely 40% of the value of the Trust fund on her death) and this charge will be in addition to the RP Regime tax charges (albeit the entry charge paid would likely be included as a credit against the IHT payable on the reservation of benefit amount chargeable on death).
(vii) The spouse exemption for IHT will not be available on the death of the Widow and the commencement of the Husband's life interest. Furthermore, the Trust remains subject to the RP Regime throughout the Husband's lifetime.
(viii) Finally, there is no rebasing of the trust assets on the Widow's death for the purposes of capital gains tax.
21. It follows that the 2009 Appointment has given rise to immediate and ongoing IHT charges that would not have arisen had the Clause 2(a) trusts not been terminated in the 2009 Appointment. The adverse tax consequences are significant. According to the calculations prepared by Burges Salmon, the position (using current values of the Trust) is likely to be as follows:
(i) IHT charges (including estimated late payment interest and penalty charges) already accrued (comprising entry charges, exit charges and one 10-year charge) of approximately £18.4m.
(ii) An estimated future 10-year charge in 2029 of £1.7m, with a pro-rata amount if the Widow dies before then.
(iii) A charge on the Widow's death (after allowance for entry charges etc) of approximately £4.8m.
22. Thus the total IHT charges arising as a result of the 2009 Appointment are projected to be some £24.9m.
23. This is to be compared with an estimated IHT charge of £11.2m on the death of the Husband (if the 2009 Appointment had been correctly effected) or £11.3m on the death of the Widow if the 2009 Appointment had not been executed at all. The extra IHT charges incurred as a result of the 2009 Appointment are therefore likely to be over £13m and in addition there will be no rebasing of the assets of the Trust on the death of the Widow or the Husband for capital gains tax purposes.
24. As already stated, the mistake was for the 2009 Appointment to terminate the Widow's original life interest under Clause 2(a) and then create a new life interest in her favour. If the 2009 Appointment had simply inserted a life interest for the Husband to take effect after the existing life interest of the Widow or if the Widow had exercised her power under the 1997 Appointment to create a life interest for the Husband to take effect after the termination of her own life interest, the RP Regime would not have applied, as the Widow's life interest would have been a QIIP. In those circumstances the only IHT chargeable would have been a charge of 40% on the death of the Husband or the Widow, whichever died later.
25. Article 47G of the Law provides, so far as relevant:
"47G Power to set aside the exercise of powers in relation to a trust or trust property due to mistake
(1) .
(2) The court may on the application of any person specified in Article 47(I)(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 this exercise.
(3) The circumstances are where the trustee or person exercising a power:
(a) made a mistake in relation to the exercise of his or her powers; and
(b) would not have exercised the power, or would not have exercised the power in the way it was so exercised, but for that mistake, and
the mistake is of so serious a character as to render it just for the court to make a declaration under this Article."
26. What constitutes a "mistake" for the purposes of Article 47(G) is set out in Article 47(B)(2) in the following terms:
"(2) In Articles 47E and 47G, "mistake" means (but is not limited to):
(a) a mistake as to:
(i) the effect of,
(ii) any consequences of, or
(iii) any of the advantages to be gained by,
a transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property;
(b) a mistake as to a fact existing either before or at the time of, a transfer or other disposition of property to a trust, or the exercise of a power over or in relation to a trust or trust property; or
(c) a mistake of law including a law of a foreign jurisdiction."
27. As is well established, the court must consider three questions in an application by a trustee under Article 47G in relation to the exercise of a power. These are:
(i) Has the trustee made a mistake in relation to the exercise of its power?
(ii) Would the trustee not have exercised the power, or would it not have exercised the power in the way it was exercised, but for that mistake?
(iii) Is the mistake of "so serious a character" as to "render it just" for the court to make a declaration under the Article?
28. Turning to the first question, we have no hesitation in concluding that KTC was operating under a mistake in relation to the 2009 Appointment. It intended to assist the IHT position of the Trust by deferring the imposition of IHT from the death of the Widow until the death of the Husband (assuming he survived her). However, because of the erroneous advice from Mr Bramall to the effect that the terms of the 2009 Appointment were effective to achieve this objective, the effect of the 2009 Appointment was completely different and extremely disadvantageous to the Trust.
29. Article 47B(2)(a) makes clear that a mistake as to the effect or consequences of, or advantages to be gained by, the exercise of a power constitutes a "mistake" for the purposes of Article 47G. It is further well established that a mistake as to such effects, consequences or advantages may relate to the tax consequences of the exercise of a power - see for example Re J Settlement [2019] JRC 111 at [19]; Re L M Will Trust [2024] JRC 107 at [43].
30. In the present case, KTC made a mistake as to the tax consequences of exercising its power under Clause 2(a) of the Trust in accordance with the terms of the 2009 Appointment.
31. As to the second question, we do not have any direct evidence from an officer of KTC because that company no longer exists. However, it is perfectly obvious that KTC would not have executed the 2009 Appointment in the form of the deed but for the mistake. KTC intended to assist the IHT position of the Trust by possibly deferring the IHT which would otherwise arise on the death of the Widow. Yet, the effect of the 2009 Appointment (because it revoked the existing life interest of the Widow) brought about seriously adverse tax consequences as described above. We are satisfied that KTC, if it had been given correct advice as to the consequences of executing the 2009 Appointment in the form in which it was drafted, would either not have exercised the power at all and left things as they were or would have ensured that the deed used to give effect to its decision did not terminate the Widow's existing life interest, but was drafted in a manner which preserved the Widow's existing life interest and simply added a successor life interest in favour of the Husband.
32. As to the third question, we are satisfied in the first place that the mistake in question is serious. As stated above, it has resulted in likely IHT liabilities of some £18.4m already being incurred with additional liabilities likely to be incurred in the foreseeable future. The existing and future liabilities are likely to exceed by some £13m the amount of IHT which would otherwise have become payable. Given that the value of the Trust is currently some £40m, the mistake is clearly a serious one with very significant adverse consequences for the beneficiaries.
33. The question then is whether it is just to make the declaration sought and avoid the 2009 Appointment. On this aspect, the court has a discretion as to whether to exercise the power conferred on it by Article 47G(2). We have no hesitation in concluding that it is just to grant the application for the following reasons:
(i) The serious consequences to the Trust will ultimately be suffered by the beneficiaries. They are not at fault. The only reason that the adverse IHT consequences have resulted is the erroneous advice of BDO which was acted upon by KTC as trustee.
(ii) Even if, as has been suggested obiter in some cases, the court may in its discretion refuse to grant relief in the case of aggressive tax avoidance, this was clearly not such a case. It was intended to be a simple exercise of a power of appointment conferred by the terms of the Trust which, if the deed had been properly drafted, would have had the effect of deferring IHT but not of avoiding it. IHT would still have been payable upon the death of the Husband, assuming that he survived the Widow.
(iii) If we were to refuse to make the declaration sought, the only alternative remedy for the Representor and the beneficiaries would be to bring an action for negligence against BDO. Given that the advice was proffered as long ago as 2008, that may not be straightforward. Repeating observations made in Re Onorati Settlement [2013] (2) JLR 324 at [44], in Re J Settlement (supra) at [28] and Re E Settlement [2018] JRC 143 at [22], we are not attracted by the proposition that, despite the existence of Article 47G which specifically allows the court to set aside the exercise of a power made under mistake, the court should nevertheless refuse to exercise that power and force a trustee and/or beneficiaries to incur further expense in what may well be uncertain litigation.
34. In some circumstances, the court might choose to refuse to grant relief on the ground that there has been excessive delay in bringing the application. The mistake in this case was made as long ago as 2008. However, it was only discovered in November 2022 and we accept that detailed investigations had to be carried out in order to ascertain the facts before the Representation was brought in October 2024. We see no reason to refuse relief on the ground of delay.
35. HMRC has been notified of the proceedings but has chosen not to intervene or make any representations. The Widow and the Husband have filed affidavits supporting the application and none of the remaining beneficiaries has indicated any opposition. This is hardly surprising given the fact that the application has been brought for their benefit.
36. For the reasons stated, we have no hesitation in concluding that the threefold test articulated in the authorities is met in this case. Accordingly, at the conclusion of the hearing we granted the relief sought and declared that the exercise by KTC of its power under Clause 2(a) as reflected in the 2009 Appointment was voidable and that the 2009 Appointment should be set aside and was of no effect from the time of its execution. It follows that the terms of the Trust remain -“ and have at all times remained - as set out in Clause 2(a) of the original trust deed.
37. The court also ordered that the Representor should have its costs out of the Trust on the trustee indemnity basis, that Advocate Evans should have his costs out of the Trust on the same basis and that the parties convened should have their costs out of the Trust on the indemnity basis.
Authorities
Trusts (Jersey) Law 1984.
Re J Settlement [2019] JRC 111.
Re L M Will Trust [2024] JRC 107.
Re Onorati Settlement [2013] (2) JLR 324.