In a recent decision, the Royal Court considered setting aside a trust on the grounds of mistake. This is the first Jersey case decided after the introduction of the recent amendments to the Trusts (Jersey) Law 1984, which include provisions concerning mistake.
The settlor sold his share in his family's business and settled the proceeds in a Jersey trust as part of a move to the Isle of Man.
Despite having taken tax advice, the settlor was unaware that, under English deemed domicile rules, he would continue to be treated as UK resident and domiciled for up to three years (regardless of the fact that he had elected the Isle of Man as his domicile of choice), triggering tax liabilities accounting for 25% of the trust fund.
The settlor therefore sought an order from the Royal Court that the trust be set aside on the grounds of mistake under Article 11 or alternatively under Article 47E of the Trusts (Jersey) Law 1984 (as amended). He argued that had he known of the tax consequences at the time, he would not have established the trust then (or possibly at all).
The Royal Court considered the interplay between Articles 11 and 47E. It noted that relief under Articles 47B to 47H requires the pre-existence of a trust in order for the court's discretion to declare a transaction voidable to be successfully invoked, whereas relief under Article 11 can be applied for where the creation, validity and duration of a trust is at stake. On that basis, the court concluded that:
- the provisions are distinct from one another;
- Article 11 still stands and has not been subsumed within Article 47E; and
- it would approach these proceedings under Article 11 of the law.
To decide whether the relief should be granted, the court applied the three-part test established in Re Lochmore Trust:(1)
- Was there a mistake on the part of the donor?
- 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 court was satisfied that the settlor had wrongly appreciated the tax implications of setting up the trust and that he would not have entered into the transaction but for his incomplete understanding of the situation. The court was also satisfied that it would be unjust to leave this state of affairs uncorrected and therefore intervened to declare the creation of the trust invalid.
The court briefly alluded to the point raised by the English Supreme Court in Pitt v Holt,(2) which held that in applications involving a request for rectification of the consequences of artificial tax avoidance, relief can be refused on the grounds of public policy or on the basis that the taxpayer could be deemed to have accepted the risks associated with such arrangements. The court found it unnecessary to consider the point further in this case; however, trustees and taxpayers relying on expert tax advice should keep this in mind.
The trustee sought an order from the Royal Court requesting that the trust fund cover the trustee's administrative costs from October 1997 to date and reasonable legal fees in this action, to the extent that it could not recover these through the indemnity provided by the settlor's tax advisers. The trustee drew the court's attention to the decision in Des Pallieres v JP Morgan Chase,(3) where it was recognised that in circumstances where a fiduciary actioned to administrative proceedings acts reasonably, and in the absence of any misconduct, it would be entitled to an indemnity from the trust fund in relation to all costs and reasonable expenses.
The court distinguished the present case from both Re Buckton and the Des Pallieres v JP Morgan Chase(4) decisions and that found the trustee could not rely on Article 53 of the law or the trust deed in circumstances where the trust had been set aside. However, the trustee could still seek such an order pursuant to Article 26 of the law and the inherent jurisdiction of the court because, where no wrongdoing on the part of the trustee could be established, there would be "no equity in leaving the trustee out of pocket".
Ultimately, the court found that the trustee was entitled to pay itself (or retain costs that were already paid) the costs for the present application out of the trust assets if not otherwise paid, unless the court found these to have been incurred unreasonably. That way, if the tax advisers (which had indemnified the trustee's reasonable costs for the application) disputed the reasonableness of the costs, the matter could be brought back before the court for a determination.
This decision provides useful clarification that Article 11 is to run in parallel to the amendments in Article 47 of the law. It also confirms that the definition of 'mistake' and the test for establishing mistake under the well-known Jersey case law continues to be good law.
For further information on this topic please contact Edward Mackereth at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email (firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.