Hastings–Bass – Re Futter v HMRC [2010] EWHC 449; [2010] WTLR 609

 In Tax

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The law relating to mistake and the rule in Hastings-Bass, where trustees exercise their powers in a misapprehension as to the effect of the exercise of those powers, have developed along different lines. This is another case in which the Court was asked to apply the rule to protect the beneficiaries where the trustees had exercised their powers incorrectly because the resulting tax consequences were not as they had anticipated.

The unusual feature of this case was that the trustees had taken specific legal advice on the tax consequences but this proved to be incorrect. Despite that, the court found that the advancements made were void because the trustees had not exercised their power appropriately.

The facts

Mark Futter created a number of settlements in 1985. This case related to trusts number 3 and 5. In March 2008 the trustees exercised a power of advancement in trust number 3 which had the effect of advancing the entire capital of the trust fund to Mr Futter subject to the trust being liable for any Capital Gains Tax (CGT) arising on the disposal. The payment to Mr Futter amounted to £141,952 and incurred CGT in the sum of £90,849.

In relation to trust number 5 Mr Futter retained a life interest and had a power of appointment over the income and capital among a class of beneficiaries with default trusts in the absence of exercising the power. The trustees enjoyed the statutory power of advancement in s.32 Trustee Act 1925 with the usual modifications.

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In 1993 Mr Futter exercised the power of appointment to provide his wife with a life interest in the fund after his death and subject to that capital would pass to some of his named children. There was also a power of enlargement granted. In April 2008 the power of advancement was exercised by the trustees, with the consent of Mr & Mrs Futter, to give each of the children £12,000 subject to each bearing the CGT due on each disposal which amounted to £1,792.

The trustees had been advised by Withers that in each case personal losses generated by Mr Futter could be used to offset the ‘stockpiled gains’ within each of the number 3 & 5 settlements so that the advances would not in fact give rise to any CGT. The advisers had been considering the best way of dealing with the ‘stockpiled gains’ for some months with the trustees.

S.87 TCGA 1992 applies to settlements where the trustees are not resident or ordinarily resident in the UK. S.87(2) TCGA 1992 says that there shall be computed in respect of every year of assessment the amount on which the trustees would have been chargeable to CGT if they had been resident or ordinarily resident – these are ‘stockpiled gains’. By s.87(4) these gains are treated as chargeable gains accruing to the beneficiaries of the settlement who receive capital payments from the trustees (but the attribution of chargeable gains to beneficiaries must not exceed the amount of the capital payments received by them).

s.89 TCGA 1992 then deals with the situation where the trustees change from being non-resident to being resident in the UK (which is what happened to both settlements in this case). Gains realised during a non-resident period are attributed to beneficiaries who receive capital payments during the subsequent resident period, which in theory enables the beneficiaries to use their annual personal CGT allowances and set off personal losses against them. However, s.2(4) TCGA 1992 specifically says that in relation to these attributed gains allowable losses cannot be set off. This provision was overlooked.

Once it became apparent that the advice given was incorrect the trustees sought a declaration that the advancements out of each trust were void and of no effect.

The claimants’ case

Counsel for the trustees argued that in each case the trustees exercised their power under a misapprehension which resulted in an outcome different to that which the trustees intended. The trustees failed to take into account the true fiscal consequences of the exercise of their powers and had they done so they would not have acted as they did because minimising the impact of CGT on the extraction of funds from both settlements was a priority.

HMRC’s case

Counsel for HMRC said that the rule in Hastings-Bass has been carried to almost absurd lengths. She made three main arguments:

  1. The effect of the exercise of the trustees’ powers was not in any real sense different from that which was intended apart from the tax consequences – i.e. the primary purpose was making distributions to the beneficiaries and bringing the trusts to an end.
    In fact she argued that the effect of the transaction was the same whether undertaken by an individual or a fiduciary and therefore there could be no reason in principle for treating the mistake of an individual differently to the mistake of a fiduciary which brought about an almost identical effect. She argued that the rule in Hastings-Bass was simply one aspect of the general law of mistake.
  2. That the effect of the mistake should be significant for the rule to apply as it cannot be right that every time trustees do something which they later regret they can say that they never did it in the first place. In this case, for example, the unforeseen CGT charge of £1,762 for each beneficiary would not amount to a significant mistake.
  3. The Hastings-Bass rule did not exist to enable advisors to be relieved of liability for giving bad advice.

The outcome

The Judge did not accept any of HMRC’s arguments. He made the point that the rule in Hastings-Bass is not founded on the law of mistake but the law relating to powers and these separate arguments were not synthesised in Sieff v Fox[2005] WTLR 891 even though in that case submissions were made that it would be odd for the two rules to produce different outcomes.

Tax liabilities generated by the exercise of a power have in the prior cases been taken into account to vitiate the exercise of the power. In Abacus v NSPCC [2001] WTLR 953 a failure by the trustees to consider the fiscal consequences of their acts was a reason for applying the rule.

The approach adopted in Sieff v Fox requires the court to first decide on a reasonable basis what factors the trustees ought to have taken into account. On the prior case law it is clear that the tax consequences for the trust or for the beneficiaries are factors to be taken into account. The rule exists not to relieve advisers from negligence but exists to ensure that the beneficiaries do not suffer by an invalid exercise of a power by trustees.

As to whether the Deeds exercising the powers were void or voidable (something which was open for debate on the basis of previous cases) the Judge decided that they were void. He acknowledged that the decision could have a potentially unfair and disruptive effect but it could be mitigated in a particular case. He disagreed with Lewison J in the Ogden v Trustees of RHS Griffiths 2003 Settlement [2008] WTLR 685 who said that if the relief is discretionary it must follow that the relevant transaction is voidable and not void.

The reasons for taking a different view included the point that if the origins of the rule lie in the law relating to the invalid exercise of a power rather than the law of mistake then in principle an invalid exercise of a power should result in a void transaction. The trustees have not made a decision within the ambit of the power.

As a result the property passing under the Deeds executed in exercise of the power must be returned to the trustees who are to be treated as if the property with which they parted was at all material times part of the trust fund and they must pay whatever tax, interest and penalties are due on that footing.

Practice points:

  1. Always consider ALL the tax consequences of any actions to be taken when acting in a trustee or fiduciary position.
  2. If all else fails, as long as it is a trustee or anyone acting as a fiduciary who makes a mistake, there may be a way out – use the rule in Hastings-Bass to apply to the courts for a wiping of the slate.
  3. However, no case on this issue has yet reached the Court of Appeal and that court may reach a different conclusion. HMRC have decided to appeal this case the result of which should be heard in the autumn.

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