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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+44 (0)20 7466 2350

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