Capital gains tax - Gifts

(1) Patricia Madge Pitt (2) David Neville Waite Shores v (1) David Langford Holt (2) Revenue & Customs Commissioners: (1) Mark Stephen Futter (2) Clive Donald Cutbill v (1) Elizabeth Gaye Futter (2) Adam Jacob Futter (3) James Daniel Futter (4) Natalie Helen Futter (5) Revenue & Customs Commissioners: CA (Civ Div) (Lords Justices Mummery, Longmore, Lloyd): 9 March 2011

The appellant commissioners appealed against two decisions setting aside respectively a settlement and the assignment of an annuity, and the exercise by trustees of powers of advancement, on the basis of the so-called rule in Re Hastings-Bass (Deceased) [1975] Ch 25.

In the first case, the late husband of the claimant (P) had been very badly injured in a road accident.

His personal injury claim was compromised on the basis of a structured settlement under which a lump sum was payable as well as monthly payments.

With the benefit of professional advice, the lump sum and the annuity were placed into a discretionary trust for the husband’s benefit by P acting as his receiver with the approval of the Court of Protection.

The settlement had inheritance tax consequences which could have been avoided if the trust had been drafted so as to fall within section 89 of the Inheritance Tax Act 1984.

The judge held that the settlement of the lump sum and the assignment of the annuity were to be set aside under the Hastings-Bass rule, though he would not have come to the same conclusion on the basis of mistake.

The second case arose from the exercise by trustees of powers of advancement under two discretionary trusts.

In respect of one trust, a power of enlargement was exercised in such a way that the claimant (F) became absolutely entitled to the fund.

In respect of the other trust, the trustees exercised their power of advancement under section 32 of the Trustee Act 1925.

In each case, it was wrongly thought that losses incurred by the recipient beneficiary could be set off against gains arising when the powers were exercised which had the effect of bringing stockpiled gains onshore.

The judge held that the advancements were vitiated under the Hastings-Bass rule and should be set aside. He held that the consequence was that the transactions were void.

He did not consider any alternative approach based on mistake.

The commissioners submitted that it was wrong to treat the acts of P or the trustees of the settlements in the case of F as vitiated by the fact that the fiscal consequences of what was done were different from what was expected.

Held: (1) What had come to be called the Hastings-Bass rule was not derived from the ratio of that case but from the decision in Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 ChD, Mettoy considered and Hastings-Bass explained (see paragraphs 64, 94 of judgment).

(2) The purported exercise of a ­discretionary power on the part of trustees would be void if what was done was not within the scope of the power.

By contrast, if an exercise by trustees of a discretionary power was within the terms of the power, but the trustees had in some way breached their duties in respect of that exercise, then (unless it was a case of a fraud on the power) the trustees’ act was not void but it might be voidable at the instance of a beneficiary who was adversely affected (paragraphs 96-99).

(3) It was not possible to lay down any clear rule as to the matters which trustees ought to take into account when considering the exercise of a power of advancement or some other dispositive discretionary power.

Fiscal consequences might be relevant considerations which the trustees ought to take into account, Sieff v Fox [2005] EWHC 1312 (Ch), [2005] 1 WLR 3811 considered (paragraphs 115, 118).

(4) In a case where the trustees’ act was within their powers, but was said to be vitiated by a breach of trust so as to be voidable, if the breach of trust asserted was that the trustees failed to have regard to a relevant matter, and if the reason that they did not have regard to it was that they obtained and acted on advice from apparently competent advisers, which turned out to be incorrect, then the charge of breach of trust could not be made out, Abacus Trust Co (Isle of Man) Ltd v Barr [2003] EWHC 114 (Ch), [2003] Ch 409 approved.

(5) The rule in Re Hastings-Bass, as developed from Mettoy onwards, was not a correct statement of the law.

The correct principle was that the trustees' duty to take relevant matters into account was a fiduciary duty, so an act done as a result of a breach of that duty was voidable.

Fiscal considerations would often be among the relevant matters which ought to be taken into account.

Where acts which were within the powers of trustees were said to be vitiated by the failure of the trustees to take into account a relevant factor, such as tax consequences, a beneficiary would have to show a breach of fiduciary duty on the part of the trustees and that could not be shown where the trustees acted on apparently competent advice (paragraphs 126-131).

(6) In the case of F, the trustees failed to take into account a relevant matter, namely the prospective charge to capital gains tax on the distributions which the enlargement and advancements represented, but they did so in reliance on apparently competent professional advice.

It followed that the enlargement and the advancements were not only not void, because they were within the relevant powers of the trustees, but they were also not voidable, because no breach of fiduciary duty was committed in the process of making them (paragraphs 143-144).

(7) P as receiver had had power to enter into the deeds of settlement and assignment that were sought to be set aside.

She had sought proper professional advice and acted on it. Therefore, there was no breach of fiduciary duty by her as receiver in entering into the deeds. It followed that they were not void or voidable (paragraphs 161-163).

(8) In the absence of all circumstances of suspicion, a donor could only get back property which he had given away by showing that he 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, Ogilvie v Littleboy (1899) 15 TLR 294 HL followed.

The equitable jurisdiction to set aside a voluntary disposition for mistake could be invoked where there was a mistake as to the legal effect of the disposition or as to a fact which was basic to the transaction, Gibbon v Mitchell [1990] 1 WLR 1304 ChD and Lady Hood of Avalon v MacKinnon [1909] 1 Ch 476 ChD considered.

The fact that the transaction gave rise to unforeseen fiscal liabilities was a consequence, not an effect, for that purpose, and was not sufficient to bring the jurisdiction into play (paragraphs 167-210).

(9) Even though P was under a mistaken belief at the time of the disposition that there were no adverse tax consequences of what was proposed, and that was a mistake of sufficient gravity to satisfy the Ogilvie v Littleboy test, nevertheless it was not a mistake as to the legal effect of the disposition but as to its consequences, and it therefore did not qualify as a basis for invoking the jurisdiction of equity to set aside a voluntary disposition for mistake (paragraphs 211-220).

Appeals allowed.

Philip Jones QC, Ruth Jordan (instructed by in-house solicitor) for the appellants; William Henderson (instructed by Thring Townsend Lee & Pembertons) for the respondents in Pitt; Richard Wilson, Jennifer Seaman (instructed by Withers) for the respondents in Futter.