In a historic judgment, a special seven member Supreme Court has clarified two grounds on which the courts may set aside trustee decisions. These grounds are:

  • The Hastings-Bass rule
  • Mistake

This note considers what the judgment means for pension scheme trustees.

The facts

The judgment covers two separate cases; Futter v. HMRC and Pitt v. HMRC.

In Futter v. HMRC, the trustees of two private settlements distributed capital within the scope of their powers. Contrary to the legal advice they followed, the distributions led to a large capital gains tax liability. The trustees sought to have the distributions set aside.

In Pitt v. HMRC, a discretionary settlement (the Special Needs Trust) for damages was drafted, following professional advice, without considering inheritance tax. On Pitt’s death an immediate inheritance tax liability fell due. The trustees sought to have the trust set aside.

The Hastings-Bass rule

In 1974, the case of Re Hastings-Bass established a principle (the so-called Hastings-Bass rule) that allows the court to set aside trustees’ actions which have unintended results. Much to HMRC's annoyance, the rule has been used by trustees to undo decisions which have led to unexpected, adverse tax consequences. Futter v. HMRC and Pitt v. HMRC are two such cases which were fought by HMRC and the Supreme Court has clarified how the rule operates.

Based on the Supreme Court decision, the circumstances in which the court may now set aside trustee decisions under the Hastings-Bass rule are as follows:

  1. Have trustees acted outside their powers or committed a fraud on the power?
    1. if yes, decision is void
    2. if no, see 2 below
  2. Have trustees considered all the relevant factors, including fiscal issues?
    1. if yes, court cannot intervene
    2. if no, see 3 below
  3. Have trustees acted on legal advice which led to failure to take into account relevant factors?
    1. if yes, court cannot intervene
    2. if no, see 4 below
  4. Is failure to consider all relevant factors serious enough to constitute a breach of duty?
    1. if yes, decision is voidable at court’s discretion if action taken by a beneficiary
    2. if no, court cannot intervene

Example – when is a decision void and when is it voidable?

If pension scheme trustees award a lump sum death benefit to an individual who was outside the category of potential beneficiaries in the scheme rules, they are acting outside their powers. Therefore, the decision is treated as void (i.e. it will be treated as though the decision was never taken).

However, if they award the lump sum to a beneficiary who is within the category but failed to take into account all the relevant factors when making their decision and this failure was so serious that it amounted to a breach of duty, the decision is treated as voidable (i.e. the court may set aside the decision subject to any defences raised and any action being taken by a beneficiary).

Requirement for breach of duty

If trustees act within their powers, a court can only intervene in a decision if the trustees have breached their fiduciary duty in making that decision. If the trustees fail to take account of all relevant considerations and this failure is sufficiently serious, it may amount to a breach of duty. Whilst the court agreed that fiscal considerations are relevant, it warned that an exclusive consideration of fiscal matters and tax consequences or the settlor’s wishes, which is particularly true of offshore trusts, would leave the decision-making process open to serious question.

Helpfully, the court acknowledged that it would be more willing to intervene if the trustees decided on an issue of fact and they had failed to grasp the real facts.

Impact of professional advice?

If trustees follow professional advice (in general or specific terms) from apparently competent advisers and there is no other basis for a challenge, the trustees will not breach their fiduciary duty for failing to consider the relevant matters if the failure was because the advice was incorrect. This was a key factor in both cases as the tax consequences were a result of following incorrect advice. The Supreme Court held that the trustees had not acted in breach of their duty by following the professional advice and that their decisions were, therefore, not voidable. In Futter v. HMRC, this was despite the fact one of the trustees was a partner in the firm of advising solicitors.

Comment

Taking advice on important decisions is a prudent step for trustees. However, trustees still need to ensure that the advice is based on a correct understanding of matters and will not be protected where they know or ought to have known the advice was based on a misunderstanding or was incorrect. The remedy where this advice is incorrect is one in negligence against the professional adviser.

Who can initiate proceedings?

A beneficiary must initiate proceedings under the Hastings-Bass rule. It is generally inappropriate for trustees to commence proceedings and they should not assume that they may recover their costs out of the trust fund in this way.

Mistake

The courts may also set aside a trustee's decision made by mistake.

The Supreme Court ruled that, in order to rely on this ground, trustees must establish the following:

  • In most circumstances there must be a mistake about the legal nature of a transaction, or a matter of fact or law which is basic to the transaction
  • The mistake must be sufficiently central to the transaction and serious in its consequences that it would be unconscionable or unjust to leave the mistake uncorrected.

These requirements were met in Pitt v. Holt and the Special Needs Trust was set aside. This decision was based on the fact that there was nothing artificial or abusive about establishing the trust so as to obtain protection from inheritance tax for Mrs Pitt.

The court commented that in cases where the aim was to “extricate claimants from a tax-avoidance scheme which had gone wrong” the court might not interevene on the grounds that the claimants must have accepted the risk that the scheme could be ineffective or on the grounds of public policy.

Commentary

This judgment has provided clarification for trustees on the proper remit of the Hastings-Bass rule through a unanimous Supreme Court decision. It has also placed a check on the scope of the rule which has been expanding, particularly in pensions cases. The rule will continue to have limited use for trustees, including pension scheme trustees, who have acted on improper advice when exercising a discretion within the scope of their power.

In these instances trustees can consider taking an action against their professional advisers in negligence instead of making an application to court for the transaction to be avoided. This route may be much more costly and less certain for trustees. Alternatively, they may consider applying to the court for the decision to be set aside under the equitable remedy of mistake. Following this Supreme Court decision, this may be a more attractive option as the requirements have been relaxed and the court has a wide discretion to consider if, on the specific facts, the requirements have been met.

However, the position may be more complex for pension scheme trustees where decisions involve third parties. For example, if a lump sum death benefit is given to an individual by mistake, although the court may set aside the decision on the ground of mistake it may be challenging to recoup the benefit from the third party. Therefore, in such circumstances, there may be no advantage in asking the court to set aside the decision.

The moral of these sorry cases is to ensure that trustee decision-making is carried out properly so that these issues do not arise.

Cases

Futter & Anor v. HMRC [2013] UKSC 26

Pitt & Anor v. HMRC [2013] UKSC 26