On 9 May, the Supreme Court handed down judgments to the jointly heard cases of Pitt v HMRC and Futter v HMRC. The Court dismissed the appeals in both cases so far as they turned on the ‘rule in Hastings-Bass’ (ie failure to consider all relevant factors), but allowed the appeal in Pitt v HMRC on the grounds of mistake.
The Supreme Court has restricted the circumstances when decisions of trustees can be set aside for failing to consider relevant factors, but has widened (a bit) when a fundamental mistake can be used
The facts of the cases:
Pitt v HMRC (called Pitt v Holt at the Court of Appeal stage) involved a discretionary trust for Mr Pitt in relation to the damages that he was due to receive as a result of an injury. It was designed to be tax-efficient, in line with legal advice sought. However, the advice failed to consider inheritance tax consequences, as a result of which the trust incurred a substantial tax liability. The trustees sought to have the trust set aside under two grounds:
- the Hastings-Bass rule. This rule had been applied in many first instance cases so that decisions by trustees were declared to be void and set aside on the basis that the trustees had failed to take into account relevant matters when exercising their discretionary powers; and
In Futter v HMRC (called Futter v Futter at the Court of Appeal stage), the trustees were wrongly advised that exercising powers of advancement under two discretionary trusts would not incur tax charges as personal losses of the beneficiary could be offset against the trustees’ gains. However the tax advice was wrong and, as a result, the trusts incurred unexpected capital gains tax liability. The trustees also sought to have the advancement set aside on the Hastings-Bass rule that the exercise of the trustees’ discretion was flawed and therefore void.
At first instance, both cases successfully argued the Hastings-Bass rule to divest the trusts from the tax consequences stemming from the incorrect legal advice.
However, the Court of Appeal and subsequently the Supreme Court held that the Hastings-Bass rule had been misapplied. A breach of trust is needed for a transaction by a trustee to be set aside:
- If a trustee acts outside its powers (ultra vires), the trustee has breached its duties regardless of whether or not legal advice is sought.
- If the trustee has acted within its powers, considered what it was under a duty to consider, using proper care and diligence in obtaining information and advice on what should be considered, the Trustee has not breached its duties merely because the advice is incorrect.
As the trustees in Pitt and Futter had taken professional advice, the Court held it to be unfair to find the trustees in breach of their duties.
Nonetheless, the Supreme Court allowed the trust to be relieved from the unforeseen tax liability in Pitt on the grounds of mistake. The Court held that the test for mistake in the context of a voluntary settlement is different from the equivalent test in a contractual context. The former requires a causative mistake of sufficient gravity and it must be unjust to leave the mistake uncorrected. Sufficient gravity requires a mistake as to the legal nature of the transaction or as to the a matter of fact/law that is basic to the transaction. The mistake could relate to the transaction’s effect (object) or consequences. In this case, ignorance as to the inheritance tax liability of the trust was sufficiently grave to lead to a mistake being established.
If a trustee takes advice which later proves to be incorrect, the more limited rule under Hastings-Bass is unlikely to relieve the trust of the financial consequences but the broadened rule of mistake may (in some limited cases) serve to do so, depending on the facts of the case. In both rules, invalidation is still discretionary in the court and relief may not be given in some cases (eg for ‘artificial tax avoidance’ which went wrong).
In practice the effect of this judgment seems to be (by implication) that the duty of care on trustees when exercising a discretion or entering into a transaction that is authorised by the trust may have been restated to now be an obligation only to take appropriate advice about the relevant factors.
This lack of a breach of duty is unlikely to mean that the relevant adviser has a defence to a claim by the trustee for negligence or breach of contract in relation to the advice.