In the matter of the W Trust and X Trust, Royal Court Unreported Judgment, 13 May 2014

In the matter of the Robinson Annuity Investment Trust, Royal Court Unreported Judgment, 18 June 2014

Introduction

With much fanfare, Jersey became the first offshore jurisdiction to introduce a statutory test for the application of the remedies for mistake and in respect of cases where the Hastings Bass principles might apply.  Those changes were introduced through Articles 47B – 47J of the Trusts (Jersey) Law 1984 (TJL) pursuant to the Trusts (Amendment No.6) (Jersey) Law 2013.  Since then the Royal Court has not had the opportunity to consider the new article in so far as the Hastings Bass provisions are concerned.  However, over the course of 2014, there have been a number of cases where the Court has been asked to grant relief for mistake in trust cases.  The two cases highlighted in this briefing are unremarkable in their facts, but are helpful in terms of how the Court currently sees the inter relationship between the new Article 47 test for mistake and the pre-existing provision of the TJL at Article 11.

The W and the X Trust Case

The facts were simple.  The settlor of two trusts (the W and the X Trusts) was domiciled and resident in the UK.  He had set up the trusts based on tax advice.  Furthermore the transfer of various assets from the settlor into trust was also done on the basis of tax advice with the aim of avoiding IHT on the assets on his death.  Unfortunately for the settlor and his family, not only did the establishment of the trusts and the transfer of assets into them, not have the desired tax advantages, but there were “colossal disadvantages” according to the Court.  The settlor would have been treated as having made a transfer of value at the time of each settlement, and the settled property would have been subject to the ten yearly and exit charges.  To make matters worse, the settlor had reserved a benefit in the settled property and therefore the property would have been treated as forming part of his estate for IHT purposes.  There were CGT consequences also.

In terms of how this Court (presided over by the Deputy Bailiff, Mr William Bailhache) approached the matter, it accepted the submission from counsel for the representor that because the primary relief sought was the actual setting aside of a trust, Article 11 was the correct provision to apply and not Article 47.  The Court approved the principle that a mistake about the tax effects of a particular transaction could be treated as a relevant mistake, and also concluded that the transfer of assets into trust was essentially part of the same transaction as the establishment of the trust.  Having made those findings, the Court had no difficulty in applying the well-established test most recently enunciated in the case of the “S” Settlement [2011] JLR 375, and accordingly set aside the W Trust and the ultimate transfer of assets into that trust.

The Robinson Annuity Investment Trust

The judgment in this case is more helpful because it sheds greater light on the Court’s thinking on how it would apply Article 11 of the TJL on the one hand, and Article 47 on the other.  The facts of the case  bear a resemblance to the W Trust and the X Trust case above.  This case involved once again advice provided by the firm Baxendale Walker.

At its heart, the facts were that a UK domiciled and resident individual was advised that he should settle his family home on a form of Jersey purpose trust as well as cash, and enter into a form of contract which would pay him an annuity at the age of 75, and that if he did so, he would remove his estate and its assets from the IHT net.  This advice was, to quote the Bailiff, Sir Michael Birt who presided, “completely wrong”.  The Court found there had been a mistake as to the tax consequences and under the heading of impossibility of performance, as a result of the fact that the relevant trustee was not licenced under the Insurance Business (Jersey) Law 1996 to pay annuities (which represented long term insurance business) and nor would there have been sufficient assets in trust to have paid the settlor an annuity each year.

In terms of the Court’s application of the law, notwithstanding that the contracts to pay the annuities were governed by English law, the Royal Court stated that it had to apply Jersey law by virtue of Article 9(1) of the TJL, which provision provides that not only must Jersey law be applied to the question of the validity of a Jersey Trust, but also must be applied in respect of the transfer of property to the trust.  As in the W and X Trust case, the Court found that the creation of the trust itself and the annuity contracts, were so closely linked that they should be considered together.  Having set out in its judgment the provisions of Article 11 and the relevant parts of Article 47, the Court said this:

The introduction of these provisions immediately raises the question of the relationship between Article 11 and Article 47E.  We have to say that, like the court, presided over by Bailhache, Deputy Bailiff, in Boyd v Rozel Trustees (Channel Islands) Limited [2014] JRC 056 we have not found this to be very easy.  Article 47E appears to be dealing only with dispositions to a trust whereas Article 11 is dealing with the trust itself; but in many cases the two are inextricably linked, because without any trust property there can be no trust.  Furthermore, in many, if not most cases, the transfer of property will occur at much the same time as the creation of the trust and the same mistake will be operating on the mind of the settlor both in relation to the creation of the trust and the transfer of the property to it.  It is therefore somewhat surprising to find the legislature dealing with the creation of a trust and the transfer of property to a trust in completely separate parts of the Law.  What is clear, however, is that the test to be applied by the Court is identical whether the matter is considered under Article 11 or under Article 47E.

The Court noted that the statutory test was virtually identical to the test that was best summarised in the Lochmore case [2010] JRC 068 where the Court set out three questions as follows:

  • Was there a mistake on the part of the settlor?
  • Would the settlor not have entered into the transaction “but for” the mistake?
  • Was the mistake of so serious a character as to render it unjust on the part of the donee to retain the property?

The Royal Court then said:

The only difference between the test thus enunciated and the statutory test set out in paragraph (3) of Article 47E is that the wording concerning the seriousness of the mistake is inverted.  Thus in (iii) above the Court decides whether a mistake is so serious as to render it unjust for the donee to retain the property whereas in paragraph (3), the question is whether the mistake is so serious as to render it just to set the transfer aside.  This appears to us to be a distinction without a difference.

The cases had also made clear that it did not matter whether the mistake was of fact, law, effect or consequences.  Thus a mistake as to the tax consequences of a trust or a transfer to a trust was a mistake for these purposes (see Re S Trust [2011] JLR 375).  It seems clear that the definition of mistake in Article 47B(2) is to like effect.

It follows that the outcome (in terms of whether the application succeeds) will not be affected by whether the application is considered under the case law or under Article 47E(3).

Ultimately, because the applicant in the Robinson case was seeking to have the trust itself declared invalid, the Court opted to apply Article 11 and the test in the Lochmore Trust case.  Having applied the test, the Court was satisfied that it could grant the relief and set aside the trust and the transfer of property to it.

Conclusion

The judgment here is helpful because although the Court was mystified as to why essentially what it considered to be the same remedy was set out in different parts of the TJL, it did conclude that the remedies were the same, that the transfer of assets to a trust is inextricably linked to the creation of the trust, and that therefore in essence, either provision could be applied.  Nonetheless I recognise that the Trust Law Working Party may need to review whether it would be helpful for some clarification to be provided in the next round of TJL changes.  Crucially though, and this should not be overlooked, the new Article 47 provisions introduced a statutory Hastings Bass test which is not repeated in Article 11, and which the Court has not had the opportunity of considering yet.