We recently reported on the English Court of Appeal’s decision in the combined appeals of Futter v Futter and Pitt v Holt1 which clarified the approach to setting aside transactions for mistake under English law. The Jersey Royal Court considered the English position and has come to a different conclusion.
The English courts’ approach
The Court of Appeal in Pitt v Holt considered both the principle in Re Hastings-Bass (the subject of our earlier Alert) and the English courts’ approach to setting aside voluntary transactions for mistake.
The Court of Appeal clarified the three-stage test for setting aside a voluntary transaction for mistake:
- There must be a mistake
- The mistake must relate to the legal effect or an existing fact which is basic to the transaction
- The mistake must be sufficiently serious to render it unjust for the recipient to retain the transferred asset.
It is the second part of the three stage test which has caused most controversy. English courts have drawn a distinction between (i) the effect and (ii) the consequences of a transaction. Cases involving a mistake as to the fiscal consequences of a transaction, which includes the impact of taxation, do not fall within the type of mistake where an English court will exercise its equitable jurisdiction to set aside a transaction. The approach has left professionals who make a mistake as to the fiscal consequences of a transaction without the option of playing the “get out of jail free card” - encouraging a client to apply to court to set aside the transaction for mistake. The English test is in contrast to the approach taken in Jersey.
The Jersey Royal Court’s decision
In In the matter of the Representation of R2 the Jersey Royal Court was invited to reconsider the approach under Jersey law for setting aside a voluntary transaction for mistake, given the English Court of Appeal’s recent decision in Pitt v Holt.
In this case a UK tax resident settlor transferred a number of shares to a company incorporated in Jersey. As it turned out the transfer was subject to an inheritance tax liability and due to the US residency of the beneficiaries, there was the potential for a tax charge of up to 100% of the value of a distribution under US tax law.
The settlor applied to set aside the transfer on the basis of mistake.
The Jersey Royal Court considered whether its approach to setting aside a transaction for mistake should change following the Court of Appeal’s decision in Pitt v Holt. Jersey courts chose not to adopt the English courts’ distinction between the effect and consequences of a transaction and applied a different three-stage test:
- Was there a mistake by the settlor?
- But for the mistake, would the settlor have made the transfer?
- Was the mistake of so serious a character as to render it unjust on the part of the recipient of the transfer to retain the property?
Despite criticism in the Court of Appeal’s decision of the Jersey court’s approach, the Jersey Royal Court upheld the test, finding that the transfer of shares by the settlor was voidable. In coming to its decision the Jersey Royal Court stated that: “we see no reason for adopting a judicial policy in this country which favours the position of the tax authority to the prejudice of the individual citizen, and excludes from the ambit of discretionary relief mistakes giving rise to unforeseen fiscal liabilities”. The Jersey Royal Court also criticised the Court of Appeal’s decision: “The remedy for Mrs Pitt, according to the Court of Appeal, was to sue her advisers. Having been failed by one set of advisers, she [as the settlor] was to entrust herself to another set and to commit herself to the risks, uncertainties and expense of further litigation.”
The Jersey Royal Court’s decision may come as no surprise, following Jersey precedent. From a policy perspective the Jersey Royal Court’s decision is advantageous for Jersey’s financial services industry, favouring the setting aside of a transaction made due to a mistake rather than a claim against the professional adviser. From a legal perspective, the decision leaves a gap between the position under English law and Jersey law, although the gap may be closed when the English Supreme Court hears the appeal of Futter v Futter and Pitt v Holt.
It is an important reminder of two related issues: (i) although English law remains persuasive in offshore jurisdictions such as Jersey, the position is not necessarily the same and (ii) jurisdictional considerations, the settlor in the Jersey case was resident in England for tax purposes but given the trust and trustee were based in Jersey (albeit the trust was subject to English law), the Jersey Royal Court decided that it had jurisdiction to decide the case.
The decision is likely to result in more trust professionals considering - and recommending - Jersey-based trusts and may well persuade existing professional trustees to move to Jersey to mitigate risk. We may also see an increase in transfers to Jersey-based qualifying recognised overseas pension schemes (QROPS).