In the matter of the A Trust and in the matter of Article 11(2) of the Trusts (Jersey) Law 1984 (as amended) JRC245
This judgment of the Royal Court in Jersey is of interest for its determination of the relevant test to be applied in order for a voluntary disposition by an individual to be declared invalid on the ground of mistake, and also for deciding that such a disposition is voidable rather than void.
Mrs B sought a declaration, pursuant to Article 11(2) of the Trusts (Jersey) Law 1984 as amended (the "Trusts Law") that a trust (the "Settlement") had been established by mistake and was consequently invalid. Article 11(2)(b)(i) of the Trusts Law provides that a trust "… shall be invalid … to the extent that the court declares that …. the trust was established by … mistake …".
Mrs B was given tax advice to the effect that she should transfer funds which she was to receive as a result of matrimonial proceedings into an offshore trust. The Settlement was established in standard discretionary form, by means of a declaration of trust executed only by the trustee and not also by Mrs B. Mrs B was one of the beneficiaries and also the protector, with powers of veto and the power to appoint and remove trustees.
Whilst the trust instrument recorded that the initial property was £5,000, this sum had not in fact been received by the trustee at the time of execution of the Settlement. What happened was that Mrs B's divorce lawyers gave instructions for the proceeds of the sale of shares in a family business (the "Sale Proceeds") to be paid to the trustee. Following receipt of this sum, which was in excess of £5m, the trustee applied £5,000 as the initial property and executed an instrument of addition in relation to the balance.
A number of investments were made by the trustee, including the acquisition of two residential properties, in Ascot and London, and a loan was made to Mrs B to enable her to purchase her English residence in her own name.
Following a change of tax adviser, Mrs B was informed that, if she moved into either the Ascot or the London property, she would have to pay market rent, failing which the tax benefit of having the Settlement would be defeated. The terms of the Settlement were also explained to her for the first time and it was at this stage that she discovered that the assets were no longer held in her own name, but were held by the trustee, which had discretionary powers of disposal in relation to them.
Further, and more concerningly, the new tax adviser explained that, whilst Mrs B had non-domiciled status for UK Income and Capital Gains Tax purposes, she did not have this status for Inheritance Tax ("IHT") purposes. The consequence of this was that the disposal of the Sale Proceeds into the Settlement was immediately chargeable at lifetime rates and Mrs B was liable to pay approximately £1m in IHT.
As the Settlement was executed by the trustee alone, Mrs B did not seek to set aside the Settlement itself: rather, her application was that the Settlement be declared invalid to the extent that it related to Mrs B's voluntary disposition of the Sale Proceeds.
The court reviewed English and other relevant authorities in relation to mistake, beginning with the traditional test (as set out by Millett J in Gibbon -v- Mitchell (1991) WLR 1304) which required the mistake to be as to the effect of the transaction itself rather than just as to its consequences or the advantages to be gained by entering into it.
In Sieff -v- Fox (2005) 1 WLR 3811, Lloyd LJ referred to a 19th century case which did not appear to have been cited in Gibbon -v- Mitchell. This was the case of Ogilvie -v- Allen (1899) 15 TLR 294 in which the House of Lords had agreed with the judgment of Lindley LJ in the Court of Appeal (Ogilvie -v- Littleboy (1897) 13 TLR 399), setting out a broad principle of injustice (in the sense of it being unjust, in view of the seriousness of the mistake, for the donee to retain the property in question) as the test for setting aside a voluntary disposition.
Having noted this earlier case, it was not in fact necessary for Lloyd LJ (in Sieff -v- Fox) to determine which of the two tests was correct. However, the point did arise for decision in this application, as Mrs B's mistake as to her domiciled status was not a mistake as to the effect of the dispositions into the Settlement. Mrs B had given instructions for the Sale Proceeds to be added to the Settlement, as indeed had happened. The mistake was in relation to the fiscal consequences rather than as to the effect of the disposition.
The Royal Court noted that, in the context of Hastings-Bass applications made by trustees, unknown tax consequences are considered relevant to the exercise of the court's discretion.
The wider test
Observing that English law had moved on and that the wider test supported by Ogilvie -v- Allen had been applied in preference to the narrower test in Gibbon -v- Mitchell, and that Isle of Man authorities had found fiscal mistake as to consequences enough to set aside a transaction, the Royal Court held that, under Jersey law, the relevant test for setting aside a voluntary disposition on the grounds of mistake by an individual is the wider one: namely, whether the donor or settlor "was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him."
When applying this test, the court must be satisfied that the donor or settlor would not have entered into the transaction "but for" the mistake.
The court also ruled that relief could be granted whether the mistake was one of law (as in this case) or of fact.
Turning to the circumstances of Mrs B's application, it was found that there was a mistake of law as to her domiciled status; it was serious (as it gave rise to an immediate tax liability of approximately £1m, which constituted a significant proportion of Mrs B's wealth); and it was clear that she would not have made the disposition "but for" the mistake. It was also found that neither the trustee nor the other beneficiaries of the Settlement would be adversely affected by the dispositions being set aside, and that it could not be just for the donee to retain the gift in circumstances where Mrs B might have to sell her own home in order to settle the tax liability. The court accordingly set aside the disposition of the total sum paid over, i.e. the full amount of the Sale Proceeds.
The narrower test
The court also considered whether, in the circumstances before it, the narrower test, as set out in Gibbon -v- Mitchell (i.e. as to the legal effect of the dispositions), would also be satisfied. Looking at the evidence before it, the court concluded that Mrs B had not been advised of and did not understand the terms of the Settlement and was therefore also mistaken as to its effect.
The court then proceeded to consider whether, in view of its declaration that the Settlement was invalid, the transactions were void or voidable. The distinction was relevant in this case in the context of Mrs B's dealings with the Inland Revenue. Whilst there would be no reporting obligation if the dispositions were void, there would be a reporting obligation if they were voidable and a tax liability would have arisen, with the consequence that a claim for repayment would have to be made once the dispositions had been declared void.
The court was referred to authorities on the void/voidable debate in the context of Hastings-Bass applications and held that, in the case of voluntary dispositions by individuals of their own property, the reasoning of Lewison J in Ogden -v- Trustees of the RHS Griffiths 2003 Settlement (2008) EWHC 118 (Ch) should be followed. Accordingly, a disposition stands unless and until, in the exercise of the court's discretion, it is set aside for mistake: it is voidable, not void.