Royal Court of Jersey applies Hastings-Bass provisions in relation to incorrect tax advice

We have previously reported on two provisions of the Trusts (Jersey) Law 1984, Articles 47H and 47G, which had been introduced following the UK Supreme Court’s judgment in Pitt v Holt [2013] UKSC 26 (see our previous post here).  That judgment overturned years of common law case law as to what had been thought to be the rule known as the rule in Re Hastings-Bass. In a recent judgment, In the matter of the L Trust [2017] JRC 191, the Jersey Royal Court applied Articles 47H and 47G to set aside an exercise of a power by a trustee who had relied on incorrect tax advice when deciding to act. This decision demonstrates the Jersey court’s continued willingness to act to protect beneficiaries where trustees have relied on incorrect advice when making decisions.

Background facts

In 1986, Mr C declared a discretionary trust in favour of himself, his wife and his children (including unborn issue) over various assets, most notably his UK family home. The trust was declared under Jersey law and was managed by a succession of professional trust companies. In 2003 the first of these trustees executed a deed (a) appointing an irrevocable life interest in the trust fund to Mr C, and (b) varying the terms of the trust to incorporate protector provisions and appointing a protector. In 2013, the second trustee executed an instrument appointing a joint life interest in the trust in favour of Mr C and his wife, Mrs C. On both occasions, the purpose of granting a life interest was to give Mr C (and later Mrs C) a right of residence in relation to the UK property.

Prior to executing the 2013 instrument, the second trustee sought and obtained tax advice from a firm of UK tax accountants on the tax effect of the instrument. Mr C was, at the time, a resident in the UK for inheritance tax purposes. The tax accountants advised the trustee that the appointment of the joint life interest would ‘not create any tax issues at all‘. However in 2016, new tax advisers were engaged and advised the trustee that the 2013 instrument had in fact given rise to significant UK inheritance tax liabilities. Advice from leading English counsel confirmed this position. As a result, the trustee, supported by all adult beneficiaries and counsel for the unborn beneficiaries, brought an application under Articles 47H and 47G of the Trusts (Jersey) Law 1984 to set aside the appointment of the life interest under the 2013 instrument.

Judgment

Articles 47H and 47G

The Royal Court began by considering the application of Article 47H. Article 47H confers a jurisdiction on the court to void a trustee’s exercise of a power where (a) in exercising that power, the trustee failed to take into account relevant considerations or took into account irrelevant considerations, and (b) the trustee would not have exercised the power in the way it did but for its failure to take into account the proper considerations.

In relation to the 2013 instrument, the Royal Court accepted that the tax consequences of the instrument were a relevant consideration. Although the trustee had sought advice in relation to the tax consequences, the advice it received was incorrect. As a result of this, the trustee had failed to take into account the actual tax position when deciding to exercise its power. That it was not at fault in relation to this failure was irrelevant to the application of Article 47H as Article 47H(4) provided that it ‘it did not matter‘ whether the failure occurred as a result of ‘any lack of care or other fault on the part of the trustee‘.

The Royal Court also accepted that the trustee would not have exercised its powers in the same way had it been properly advised as to the tax consequences. It had not been essential or urgent to grant Mrs C a right of residence in the property and the tax advice the trustee had subsequently received from leading counsel had indicated that there were alternative arrangements available which would have adequately protected Mrs C’s interests without adverse tax consequences (even though Mr C also received a right of residence in the property under the 2013 instrument, he was not considered in relation to this point because he already had a prior life interest under the 2003 instrument). The conditions for Article 47H being satisfied, the Royal Court set aside the appointment of the life interest under the 2013 instrument as void and of no effect from the date of the instrument’s creation.

The Royal Court came to the same result under Article 47G. Article 47G allows the court to void the exercise of a power where (a) a trustee exercising a power made a mistake in relation to the exercise of that power (including any consequences), (b) the trustee would not have so exercised the power but for the mistake, and (c) the mistake was of ‘so serious a character as to render it just’ for the court to declare the exercise of the power voidable.

Adopting the same reasoning as in relation to Article 47H, the Royal Court found that the trustee had made a mistake as to the tax consequences of the exercise of the power and that it would not have exercised the power in the way it did but for that mistake. Furthermore, as the advice of leading counsel was that the mistake was of a serious nature, and as no injustice would be suffered by the beneficiaries (all of whom supported the application) or any third parties (HMRC had been notified of the application but had not responded) if the exercise of the power was voided, it was just to set the appointment aside.

Declaration under Article 51

The Royal Court concluded its judgment by making a declaration under Article 51 Trusts (Jersey) Law that the life interest created by the 2003 deed was valid. The trustee had sought this declaration because the tax accountancy firm which had given the incorrect tax advice in relation to the 2013 instrument were arguing in separate proceedings that the 2003 life interest was invalid (and that consequently their tax advice was correct). This had created uncertainty as to how the trust should be administered.

The tax accountancy firm’s argument that the life interest was invalid was based on the protector provisions created by the same 2003 deed. These provisions required all decisions made under the trust from the date of execution of the 2003 deed to be approved by a protector. The firm argued that as the creation of the life interest occurred on the date of execution of the deed it should have been approved by the protector. No approval having been obtained, the life interest was invalid.

The Royal Court rejected this argument. On the basis of orthodox Jersey principles of construction (as summarised in Parish of St Helier v Minister of Infrastructure [2017] JCA 027) it was clear that the trustee had intended to first create the life interest and then subsequently vary the trust so as to incorporate the protector provisions. This meant that the life interest was created prior to any restrictions on the trustee’s powers and therefore did not require approval. The Royal Court was supported in this conclusion by the fact that the 2003 deed purported to create an ‘irrevocable life interest’ and that this interest had been formally accepted by the beneficiary. If the creation of the life interest was further subject to the consent of the protector, there was a possibility that the irrevocable life interest could fail despite this acceptance and its supposed irrevocability.

Comment

This relatively straightforward application of Articles 47H and 47G again demonstrates the ability of the Jersey courts to protect the interests of parties to a trust at the expense of foreign tax authorities. It is particularly illustrative as it is unlikely that any relief would have been available to the trustees had the trust been governed by English law. This is so because, following Pitt v Holt, the English courts can only assist where there has breach of fiduciary duty by the trustees. In the present case, the Jersey court found that the trustee had acted entirely properly and there had therefore been no breach of duty.

Joanna Caen
Joanna Caen
Senior Consultant
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Gareth Keillor
Gareth Keillor
Senior Associate
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The Australian Tax Office broadens its targeting of private groups

Having focused on the top 320 privately owned and wealthy groups (“Private Groups“) earlier this year, the Australian Tax Office (“ATO“) Tax Avoidance Taskforce team is about to take its next step and review the next 1,200 largest Private Groups. We set out further details below. Continue reading

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UK Supreme Court considers test for dishonesty in criminal cases

The Supreme Court of England and Wales in its recent decision in Ivey v Genting Casinos [2017] UKSC 67 (“Ivey“) took the opportunity to reassess the approach in criminal cases to determining whether a defendant has acted dishonestly. The Supreme Court held that the “Ghosh test”, which excused a defendant who did not know that ordinary and honest people would regard his behaviour as dishonest, should no longer be used. Instead the Court held that the test for dishonesty in criminal cases should be brought in line with the test already used in civil cases. We consider the decision further below.

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Citywealth Magic Circle Awards 2018 – Herbert Smith Freehills shortlisted in two categories

Citywealth has just announced its finalists for its Magic Circle Awards 2018.  We are thrilled to have been shortlisted twice. Herbert Smith Freehills has been shortlisted in International Law Firm of the Year – non UK and Richard Norridge has been shortlisted for Lawyer of the Year. There are many other trustees, advisers and firms who have been shortlisted across different categories.

If you wish to vote for any of the finalists, click here: https://www.citywealthmag.com/awards/magic-circle-awards/voting

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AUSTRALIAN COURT HOLDS THAT UNSENT TEXT MESSAGE CAN ACT AS VALID WILL

The Queensland Supreme Court has held that an unsent text message written on a man’s mobile phone shortly before he died adequately captured his testamentary intention.  In doing so, the Court dispensed with the normal execution requirements of a will, and allowed the text message to be admitted to probate: Re Nichol; Nichol v Nichol [2017] QSC 220.

The Court had been asked to determine two competing applications.  The first was brought by the deceased’s widow, and supported by his son, asking that the rules of intestacy be applied.  The second (and ultimately successful) application was brought by the deceased’s brother and nephew, who stood to gain under the terms of the unsent text message.

This case highlights the powers given to courts in other parts of the world when considering the validity of documents that purport to set out testamentary intentions.  This can be contrasted from the position of the courts in England and Wales, where the requirements for creating a will continue to be strict. We consider the decision further below.

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HIGH COURT RULES: HOMEMADE, UNCLEAR WILL IS VALID AND CREATES TRUST RATHER THAN ABSOLUTE GIFT

In the recent case of Vucicevic v Aleksic [2017] EWHC 2335 the High Court (Bristol District Registry) considered the rules relating to gifts in the context of homemade wills. The court concluded that instead of being an absolute gift, the homemade handwritten (or holographic) will of the testator gifting his properties to the Serbian Orthodox Church (the “Church“) created a gift to the Church on trust for the benefit of the people in need in Kosovo, especially children. The case highlights that the courts are often willing to adapt a flexible approach to seek to give effect to the provisions of a homemade will as long as the testator’s intentions are discernible, even if certain aspects of the will lack clarity. Continue reading

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Filed under Private wealth and trusts, Wills

ENGLISH HIGH COURT FINDS SETTLOR RETAINED BENEFICIAL OWNERSHIP

In the latest decision in the long running Pugachev dispute, the High Court considered the effect of five trusts set up by Mr Pugachev, and whether the trusts were shams. Birss J held that he would have been prepared to declare the five trusts shams, but on the true interpretation of the trust documents and considering the powers reserved to Mr Pugachev as protector, all five trusts were, in effect, bare trusts for the benefit of Mr Pugachev.

The first part of the decision has potentially wide effects in relation to assets held in trust subject to freezing orders. Paragraph 6 of the standard form freezing order in the annex to PD25A refers to “any asset which [the Respondent] has the power, directly or indirectly, to dispose of or deal with as if it were his own”. Following Birss J’s decision, this may include discretionary beneficial interests where the settlor has retained sufficient powers so as to be able to exercise effective control.

While the decision does not alter the test applied to whether a trust will be a sham, it is a rare example of the courts being prepared to find that a trust arrangement constituted a sham, and shows that the courts will look critically at the intentions on the part of the establishing trustees. We consider the decision further below.

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Transfer into Guernsey trusts set aside on grounds of mistake despite the fact the transfer was made solely to reduce tax

The Guernsey Royal Court recently ordered, under s. 69(1)(a)(iv) of the Trusts (Guernsey) Law 2007 (the “Act“), that a transfer of shares into Guernsey trusts be set aside on grounds of mistake. This was despite the fact that the transfer had been made for the sole reason of reducing tax liability. We consider the case, Whittaker v Concept Fiduciaries Ltd, further below. Continue reading

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Private Groups and Trusts under ATO scrutiny

The ATO in Australia continues to target privately owned and wealthy groups, with specific focus on groups with risky trust structures that exhibit characteristics of tax avoidance or evasion.

The ‘Tax Avoidance Taskforce – Trust’ (Taskforce) has been established to take compliance action against taxpayers who use trust vehicles in ways other than ordinary trust arrangements or tax planning associated with genuine business or family dealings. The Taskforce continues the work of the ‘Trusts Taskforce’.

The objectives of the Taskforce are to:

  • “undertake focused compliance activity on private groups involved in tax avoidance and evasion arrangements using trust structures;
  • target tax scheme designers, promoters, individuals and businesses who participate in such arrangements;
  • lead cross-agency action to pursue the most egregious cases of tax abuse using trusts; and
  • undertake projects to gather intelligence on and deal with specific risks.”

There is no doubt that the experience and issues identified by the preceding taskforce has moulded the Taskforce’s objectives and areas of identified risks.

Whilst the areas reviewed by the Taskforce could be much wider than projected, the ATO has released the following non-exhaustive list of arrangements that attract the Taskforce’s attention:

  • trusts and beneficiaries who are not registered, or fail to lodge tax returns or activity statements, despite receiving substantial income;
  • offshore dealings with secrecy or in low tax jurisdictions;
  • income entitlements being distributed to low-tax beneficiaries without apparent commercial justification, while benefits are enjoyed by others;
  • artificial adjustments made to trust income so that tax outcomes do not reflect the economic reality – TA 2013/1 identifies these arrangements as involving a deliberate mismatch between trust and taxable income. For example, the trustee of a family discretionary trust resolves to exclude a capital gain from its trust income and distributes all of the trust income to a specific beneficiary (usually a newly incorporated related company). The capital gain is distributed to another beneficiary (i.e. a family member) as a tax free capital distribution. The company is unable to repay the tax debt and is wound up;
  • revenue activities which are purposefully mischaracterised as capital items in order to access the concessional capital gains tax (CGT) discount – for example, the trustee mistreats sale proceeds received by a property developer on capital account instead of revenue account and claims the CGT discount (refer TA 2014/1);
  • deliberate changes are made to trust deeds to achieve tax planning benefits –
    TA 2016/12 identifies these arrangements as being aimed at exploiting the proportionate approach to trust taxation. For example, the trustee determines trust income to be less than taxable income, creating an artificial difference which is distributed to an individual as a tax free capital distribution;
  • transactions which have excessively complex features or sham characteristics such as round robin circulation of income; and
  • new trust arrangements by taxpayers linked to previous non-compliance.

Whilst the Taskforce is stated to be targeting tax avoidance and tax evasion, elements of the broadly described arrangements above would be evident in a range of circumstances. Therefore, it will be interesting to see the breadth of the Taskforce’s activities.

The objectives of the Taskforce continue the ATO’s focus on private groups. Private groups using trust vehicles should be wary of significant penalties, civil or criminal offences which may arise in cases of non-compliance and should consider self-amending or making a voluntary disclosure if necessary.

Andrew White
Andrew White
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Narelle McBride
Narelle McBride
Director
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Chris Aboud
Chris Aboud
Senior Associate
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Tina Huang
Tina Huang
Associate
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+61 3 9225 5943

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Regulators around the world become more vocal regarding the potential risks associated with ICOS

On 4 September 2017, seven major regulators governing the finance and technology sectors in China (collectively, the Chinese Regulators), jointly published an announcement prohibiting initial coin offerings (ICOs) in China.

The following day, the Hong Kong Securities and Futures Commission (SFC) also made a statement on existing regulations which could be applicable to ICOs and explained that digital tokens may be “securities” as defined in the Securities and Futures Ordinance (SFO), and accordingly subject to the securities laws of Hong Kong. The SFC also warned investors of the potential risks of ICOs.

The announcement by the Chinese Regulators and the statement by the SFC follow similar clarifications and announcements by regulators in the US, Canada, Singapore, Malaysia, Thailand and Dubai, among other jurisdictions, about their respective positions on ICOs. To date, the Chinese Regulators have been the only ones to issue an outright ban. You can read our e-bulletin on the Monetary Authority of Singapore’s position here.

The UK Financial Conduct Authority also issued a consumer warning on 12 September 2017 stating that “ICOs are very high-risk speculative investments” and investors “should only invest in an ICO project if [they] are an experienced investor, confident in the quality of the ICO project itself (eg, business plan, technology, people involved) and prepared to lose [their] entire stake”.

In this e-bulletin we highlight the key points in the announcement by the Chinese Regulators and the statement by the SFC and set out our observations on the future of ICOs.

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