Chancery practitioners will be busy for years assessing the impact of the Supreme Court’s conjoined decisions in the appeals of Futter and Pitt, and, in particular, considering the impact of its re-assessment of the so-called rule in Hastings-Bass, concerned with trustees who make decisions without having given proper consideration to relevant matters which they ought to have taken into account. For our purposes, the decision is of significance insofar as it provides a salutary tale regarding the need for caution in assessing all the implications prior to taking a prima facie final step regarding the disposition of P’s assets.
In the second of the two appeals before the Supreme Court, that of Pitt, the difficulty had arisen thus. In 1990, Mr Derek Pitt suffered very serious head injuries in a road traffic accident. His claim for damages for his injuries was compromised by a court-approved settlement in the sum of £1.2m. Mr Pitt’s solicitors sought advice from Frankel Topping, a firm of financial advisers. They advised that the damages should be settled in a discretionary settlement, a Special Needs Trust (‘SNT’). Frenkel Topping gave their advice in a written report to Mrs Pitt (as receiver) which was made available to the Official Solicitor, who represented her husband in the application to the Court of Protection. The report referred to various advantages which the SNT was expected to secure, and it mentioned income tax and capital gains tax in its illustrative forecasts. But the report made no reference whatsoever to inheritance tax. The SNT could have been established without any immediate inheritance tax liability if (i) it had been an interest in possession trust or (ii) it had been a discretionary trust complying with s. 89 Inheritance Tax Act 1984. In order to comply with s.89 its terms should have provided that at least half of the settled property applied during Mr Pitt’s lifetime was applied for his benefit. But the SNT as drafted and executed contained no such restriction. The consequence was an immediate liability to inheritance tax of the order of £100,000, with the prospect of a further tax charge on the tenth anniversary in 2004. At first instance, the deputy judge (Mr Robert Englehart QC) observed that by 2010 the total tax, together with interest and penalties (if exacted) must have amounted to between £200,000 and £300,000.
Mrs Pitt and her advisers became aware of the inheritance tax liabilities in 2003. In 2006 Mr Pitt (by a litigation friend) and the trustees of the SNT commenced proceedings against Frenkel Topping claiming damages for professional negligence. That claim was settled. As Lord Neuberger (giving the sole speech on behalf of the Supreme Court) observed at para. 90: "[h]ad it gone to trial the claim, even if successful in establishing duty and breach, might have faced difficulties over causation, since Mrs Pitt executed the SNT under the authority of an order of the Court of Protection, which had considered its terms. That court’s apparent lack of awareness of the importance of section 89 of the Inheritance Act 1984 is one of the most remarkable features of the whole sorry story."
Mr Pitt died in 2007. After taking further advice his personal representatives (who were also two of the trustees of the SNT) commenced proceedings seeking to have the SNT set aside either under the Hastings-Bass rule, or on the ground of mistake. The first defendant was the remaining trustee of the SNT (who took no part in the proceedings) and the second defendant was the Revenue (which actively opposed the application). Evidence was given in writing and there was no cross-examination.
At first instance, the SNT was set aside on the basis of the rule in Hastings-Bass. However, in so doing, the first instance judge indicated that, even if there had been a mistake of any sort, it was only a mistake as to the consequences of the transaction, rather than its effect, and so he would not have granted rescission of the SNT.
HMRC appealed, successfully, against both the decisions in Futter and Pitt, which were heard together. The appeals against the decision of the Court of Appeal were, similarly, heard together by the Supreme Court.
The Supreme Court dismissed the appeals against the decision of the Court of Appeal both appeals insofar as they turned upon the rule in Hasting-Bass, in essence because it concluded that the rule required that the inadequate deliberation on the part of the trustees must be sufficiently serious as to amount to a breach of fiduciary duty, and that this was not established in either case. As Lord Neuberger noted at para. 97:
"As her husband’s receiver under the Mental Health Act 1983 Mrs Pitt was in a fiduciary position but there is no suggestion that she had any professional qualifications. She devoted herself, alternating with a carer, to looking after her disabled husband. As anyone in that position would, she took professional advice from solicitors and specialist consultants. After hearing from her legal advisers and the Official Solicitor the Court of Protection made an order on 1 September 1994 authorising (not directing) her to execute the SNT and she acted on that authority on 1 November 1994… She had taken supposedly expert advice and followed it. There is no reason to hold that she personally failed in the exercise of her fiduciary duty. Unfortunately the advice was unsound."
Mrs Pitt’s appeal was, however, allowed on the basis of mistake. As a matter of law, Lord Neuberger held, the true requirement for rescission on the ground of mistake is simply for there to be a causative mistake of sufficient gravity. The mistake in her case, viewed objectively with the intense focus required, was a serious one. Mrs Pitt had an incorrect conscious belief, or made an incorrect tacit assumption, that the proposed SNT had no adverse tax effects. It was also relevant that the SNT could have complied with statutory requirements without any artificiality or abuse of statutory relief and indeed it was precisely the sort of trust to which Parliament intended to grant relief.
As noted above, this case stands as something of a cautionary tale – experienced financial advisers, solicitors, the Official Solicitor and (it would appear) the Court of Protection (in its previous incarnation) all failed to appreciate a vital provision of the Inheritance Act 1984 and therefore led Mr and Mrs Pitt up a very expensive garden path. That the garden path led, eventually, to the setting aside of the SNT was far from a given. It is perhaps to be expected that s.89 is now seared on the collective memory of those advising as to the establishment of trusts for disabled persons, but the case is a reminder that Donald Rumsfeld was correct in his identification of the dangers posed by unknown unknowns.