Futter v Commissions for HMRC1; Konica Minolta Business Solutions (UK) Ltd v Applegate

In two recent High Court cases, the Courts have looked at errors in trust documents. The outcome appears to be this: in the event of an error in a scheme’s trust deed and rules, where trustees have taken professional advice the simplest way to correct an error is by way of a rectification application rather than a so-called “Re Hastings Bass” application. In this article we explain the difference and why these cases may be of help to trustees and employers.

Re Hastings Bass – unwinding a transaction

Two cases came before the Supreme Court earlier this year. Both involved factual circumstances where trustees received erroneous advice from their professional advisers: Mr Futter had set up a trust to mitigate his capital gains tax (CGT) liabilities; Mrs Pitt was advised to settle a damages payment made to her husband following a road traffic accident into a discretionary trust in order to secure income tax and CGT advantages. In both cases the professional advisers failed to advise on unintended tax consequences, with the result that Mrs Pitt was left with an unexpected inheritance tax liability and Mr Futter an unexpected CGT liability.

The trustees in both cases applied to the court under the so-called principle in Re Hastings Bass; ie that it was void or voidable because of a failure to consider the tax consequences. A successful Re Hasting Bass application would have led to the entire transaction being treated as if had not happened so no unintended tax would be payable. HMRC intervened in both proceedings arguing that the principle in Re Hastings Bass had gone too far and should not be available where the trustees had simply received bad advice.

The Supreme Court agreed with HMRC. Neither Mr Futter, nor Mrs Pitt, could renege on the transaction in order to avoid a tax liability. The Supreme Court found that in order to unwind a transfer of assets into or out of a trust under the principle in Re Hastings Bass, the trustees would have to show that they either acted in breach of trust (ie not taking any professional advice at all) or acted beyond their powers.

The Supreme Court then went on to consider in the case of Mrs Pitt whether she could seek to set aside the trust on the grounds that she had made a mistake ie whether she could rely on equitable mistake to avoid the inheritance tax. The Supreme Court found that Mrs Pitt could do so as the mistake was of sufficient gravity.

Rectification and Summary Judgment

There have been a number of recent decisions where employers and trustees of pension schemes have applied for Summary Judgment in order to rectify a mistake in a scheme’s trust deed and rules. Summary Judgment allows parties to apply for early resolution of a case where the other party has no reasonable prospects of success.

In Konica v Applegate the trustees and employer made a summary judgment application to correct an error in the drafting of the calculation for deferred pensions. The error occurred when the trustees’ legal advisers were asked to document a new benefit structure for transferring members, following the merger of two schemes.  The intention was to replicate the benefits. However, instead of providing a group of members with a deferred pension based on pensionable service and final pensionable salary at the date of leaving, revalued until normal pension date as required by pensions law, a more beneficial deferred pension was provided for by the draughtsman, giving members an unanticipated windfall. The “new” deferred pension was calculated as the higher of the deferred pension described above and a pension calculated using the pensionable service the member could have built up had he not left early, but had instead worked until normal pension date.

The High Court granted Summary Judgment having assessed all the evidence, finding that there was never any continuing common intention to provide for an increase in deferred pensions.

The Court also considered whether or not it should prevent the employer/trustees from recouping any additional benefits which may have been paid to the deferred pensioners. The Judge did not have to decide the issue as no deferred members had in fact received a wind-fall, however, he was persuaded by the principle.

If you are in a pickle
Following these decisions, where trustees or employers find themselves in a position where there is an error in the trust deed and rules, the quickest and easiest way to erase that error  is likely to be by way of a Summary Judgment rectification application. For many trustees the opportunity to rely on the principle in Re Hastings Bass has now been removed because their errors will have been made after taking legal or other professional advice.