The so-called rule in Hastings-Bass1, which permits trustees to assert and rely on the errors of themselves or their advisors to undo actions which have unexpected tax consequences, has been somewhat curtailed by the recent decision of the Supreme Court in Futter and another v HMRC and Pitt and another v HMRC2, which largely upholds the judgment of the Court of Appeal3.
The rule in Hastings-Bass is perhaps better thought of as the rule in Mettoy4, which stated the rule as follows:
"where a trustee acts under a discretion given to him by the terms of the trust, the court will interfere with his action if it is clear that he would not have acted as he did had he not failed to take into account considerations which he ought to have taken into account."
At first instance, the decisions were set aside on this basis. The High Court decisions were successfully appealed by HMRC when they were heard together by the Court of Appeal.
In 1985 Mr Futter made two settlements, initially both with non-resident trustees. By 2004, these settlements had gains which were 'stockpiled' whilst the trust was non-resident, which had not been distributed to the beneficiaries or brought in to charge for capital gains tax purposes.
In 2008, on the advice of solicitors the (now-resident) trustees distributed all of the capital of one of the settlements to Mr Futter, exercising a power of enlargement. A further £12,000 was distributed to each of Mr Futter's three children.
The trustees incorrectly believed that the gains realised by the beneficiaries would be absorbed by allowable losses so that no eventual tax liability would arise.
In 1990, Mr Pitt suffered serious head injuries in a road traffic accident, resulting in his mental incapacity. His wife was appointed as his receiver under the Mental Health Act 1983. The damages for Mr Pitt's injuries were paid (following advice) via a discretionary settlement.
In 2003 Mrs Pitt and her advisers became aware that the settlement had been drafted in such a way as to give rise to significant and immediate inheritance tax liabilities and penalties. On Mr Pitt's death in 2007 Mrs Pitt became one of his personal representatives and the only beneficiary interested in his estate.
The Supreme Court's decision on Hastings-Bass
The key distinction which had been drawn by the Court of Appeal, and which has now been endorsed by the Supreme Court, is between trustees operating beyond the scope of their power (excessive execution – akin to acting ultra vires) and failing to give proper consideration to matters relevant to their making a decision, but still acting within their powers ie inadequate deliberation.
The Supreme Court held that only where a trustee has gone beyond his powers should the courts intervene.
Although Mettoy framed the test in terms of "if it is clear that he would not have acted", the Supreme Court felt it was inappropriate to be so prescriptive, and that the courts should instead seek the best "practical solution"; in this limited respect the rule in Hastings-Bass has arguably been widened.
The Court also confirmed the Court of Appeal's finding that where Hastings-Bass applies, the act of the trustee is "not void but it may be voidable at the instance of a beneficiary who is adversely affected".
On this formulation of the rule, the appeals of both Futter and Pitt were dismissed (so far as they turned on Hastings-Bass). Futter was complicated because one of the two trustees was also one of the solicitors advising on the course of action, but ultimately the Court held that capital gains tax was the "paramount consideration, and the trustees thought about it a great deal. But the tax advice which they received and acted on was wrong…".
Mrs Pitt received 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."
The Supreme Court's decision on mistake in a voluntary disposition
There is some consolation for taxpayers, as the Supreme Court found it appropriate to provide equitable relief to Mrs Pitt on the basis of a mistaken disposition. The Supreme Court held that "the true requirement" which would justify setting aside a voluntary disposition on the basis of mistake:
" … is simply for there to be a causative mistake of sufficient gravity … [which] will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction".
In Pitt the settlement was not structured to take advantage of section 89 of the Inheritance Tax Act 1984. Although the Court of Appeal had withheld relief on the basis that the tax impact was merely a consequence of the disposition, rather than a legal effect, the Supreme Court found this to be an artificial distinction. The settlement was "precisely the sort of trust to which Parliament intended to grant relief" – there would be nothing artificial about structuring the settlement to benefit from section 89.
The Court rejected a submission made by HMRC that a mistake which relates exclusively to tax cannot in any circumstances be relieved. The Court said that "consequences (including tax consequences) are relevant to the gravity of a mistake, whether or not they are … basic to the transaction."
Despite this, the Court said that relief might be refused:
" … either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy".
The 'tidying-up' of the rule in Hastings-Bass, which the Supreme Court has carried out, is to be welcomed, as is the widening of equitable relief for mistake in a voluntary disposition. Although this has brought welcome clarity to this complex area of the law it does not bring certainty, as a significant discretion remains with the courts in relation to both forms of relief.