Mr Pitt was left brain damaged after a road accident. His wife was appointed his receiver. Mr Pitt received £1.2m in agreed damages. Acting on the advice of financial advisers Mrs Pitt transferred the lump sum to a discretionary settlement.
The settlement was not a trust for the disabled under section 89 of the Inheritance Tax Act 1984, and so inheritance tax (IHT) was due on creation and on 10-yearly anniversaries. No one ever considered the impact of inheritance tax. On Mr Pitt’s death the IHT problem became apparent.
Mrs Pitt argued that the settlement should be set aside on two grounds: Robert Englehart QC, sitting as a deputy judge, decided that the settlement could be set aside under the Hastings-Bass jurisdiction. However, the mistake argument was not accepted, and had that been the only basis argued he would have refused the application.
- the Hastings-Bass jurisdiction; and/or
- the equitable jurisdiction to set aside a voluntary disposition vitiated by mistake.
Hastings-Bass The Hastings-Bass principle allows the court to set aside a decision made in the exercise of trustees’ discretion where ‘if they had not misunderstood the effect that their actual exercise of the discretionary power would have, they would have acted differently’.
While there is no decided authority applying the Hastings-Bass principle to anyone other than trustees, the judgments in decided cases do sometimes refer interchangeably to ‘trustees’ and to ‘fiduciaries’. In principle there is no material distinction between a trustee exercising a power for the benefit of a beneficiary and a receiver exercising a power for the benefit of a patient. In each case the power is a fiduciary one. In each case, the person exercising the power is doing so in the interests of another but is not acting on the instructions of that other.
The decision is significant because HM Revenue & Customs was represented and argued that the line of cases allowing mistakes as to tax consequences to trigger Hastings-Bass interventions should be regarded as wrongly decided. Englehart QC said he would be most reluctant to depart from such a consistent line of authority unless convinced that some critical error had been made and thereafter overlooked. There was no suggestion that this was the case and he, therefore, declined to accept HMRC’s argument.
MistakeThe court gave two reasons for refusing the argument based on mistake: (1) there was no mistake at all; (2) if there was a mistake, it was not the sort of mistake that would justify equitable intervention.
As to (1), Mrs Pitt had not mistakenly believed that IHT would not be payable. She had simply never thought about it at all.
As to (2), there has been much argument in the last few years as to the correct formulation of the rule as to the type of mistake which will justify equitable intervention. Millett J in Gibbon v Mitchell [1990]1 WLR 1304 said that: ‘[A voluntary transaction] will be set aside for mistake whether the mistake is a mistake of law or of fact, so long as the mistake is as to the effect of the transaction itself and not merely as to its consequences or the advantages to be gained by entering into it.’
If that is the correct test then a mistake, as here, as to the fiscal consequences of a transaction cannot be sufficient. However, Ogilvie v Littleboy [1897] 13 TLR 399 appears to suggest that the test is more general, namely whether the donor or settlor ‘was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him’. That formula might allow fiscal consequences to be taken into account, if they were sufficiently serious.
Englehart QC considered that the test was that laid down in Gibbon and that there was no real divergence between it and Ogilvie, where Lindley J was talking only of the level of gravity required to set aside a disposition.
Clearly the decision is good news for taxpayers so far as Hasting-Bass is concerned, but not quite so welcome in relation to mistake.
Disinherited childrenAdult children have done rather well recently in disputing wills made by parents who disinherited them. However, the recent decision in H v Mitson [2009] EWHC 311 rather redresses the balance. Anyone advising on an Inheritance (Provision for Family and Dependants) Act claim by an adult child should have a look at this case.
A mother died, aged 70, and left her whole estate (£486,000 net) to two charities, disinheriting her daughter and five grandchildren. The daughter was awarded £50,000 by the district judge and appealed on the basis that this was insufficient. The charities then successfully cross-appealed on the basis that she should have had nothing. The daughter was shown to be in a very poor financial circumstance, but that is only one factor to consider. The test is, ‘was the provision reasonable?’ and on the facts it was. The relevant factors were that there had been a long estrangement and the daughter had been well aware that her mother intended to leave her nothing. This was not a case of disappointed expectations.
Equality and civil reform billsTwo bills that private client practitioners may not expect to concern them are the Equality Bill and the Civil Law Reform Bill.
The House of Lords agreed a new clause in the Equality Bill to abolish the common law presumption of advancement which applies where husbands transfer property to, or buy property in the name of, their wives and where fathers do the same for their children.
The Civil Law Reform Bill gives effect with minor modifications to the recommendations of the 2005 Law Commission report: The Forfeiture Rule and the Law of Succession (Law Com No 295). People who forfeit their entitlement as a result of slaying the deceased or who disclaim will be treated as having predeceased.
Professor Lesley King, College of Law
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