Professional Deputies often deal with transactions or investments involving millions of pounds. There can be unintended tax consequences of when dealing with investments. The most common error is incurring a large tax liability on liquidating assets or creating a trust. In some circumstances it is possible to apply to the court for rectification or even rescission of the transaction. In layman’s terms – undoing the transaction so that the protected party avoids any loss.

This get out of jail free card stems from a line of cases involving trustees. As Deputies are trustees of the Protected Party’s money, it comes as no surprise that similar rules apply to them.

The Court of Appeal decision in re. Hastings-Bass deceased [1975] Ch25 is the leading case that sets out the conditions wherein the court can put right transactions by trustees that resulted in unintended tax consequences. This is essentially where: –

  1. The trustees had no power to dispose of the assets; or
  2. The trustees acted fraudulently in disposing of the assets; or
  3. Where the trustees acted within their powers did not act fraudulently, but acted without sufficient deliberations.

As you can see this leaves scope for a multitude of sins to be reversed, to such extent that there has been criticism of this line of cases by academics, such as Professor Charles Mitchell. In his article “Reigning in the ruling re. Hastings-Bass (2006) 122 LQR35,” where he asks “Should a beneficiary be placed in a stronger position than an outright owner if he wishes to unwind the transaction to which he has given his consent, for which it turns out to have unforeseen disadvantages?” Essentially, he does not see why very wealthy people, often seeking to avoid tax, should be given a second bite of the cherry if their attempts fail.

Perhaps the answer lies in the judge’s justification of the rule in Hastings-Bass. This is sometimes held to be analogous to a court jurisdiction to set aside a voluntary disposition on the grounds of mistake. However, although there are similarities with the law of mistake, Lord Walker in the case of Pitt v Holt [2013] 2AC108 asserts any analogy to be misleading. In a very inciteful judgement he points out that the Hasting-Bass line of cases are more cases in which the court exercises its duty to supervise trustees as fiduciaries.

In the Pitt case, a Deputy transferred personal injury monies from a Deputyship into a discretionary trust. In doing so, there arose an immediate charge for Inheritance Tax, as it was a discretionary trust that did not qualify under the relevant person’s trust rules for exemption. The Deputy applied to the court in order to have the trust rescinded, so as the immediate tax charge never took effect.

That particular transaction could not qualify under the Hasting-Bass rule, as the payment into a new trust was within the Deputy’s power to this and there was no fraud in doing so. The third ground for setting aside that equally did not apply, in that the Deputy had acted with sufficient deliberation. However, he had received inappropriate legal advice. As such the Supreme Court did not rule that the transaction could be rescinded.

In paragraph 122 of his judgment in the Court of Appeal, Lord Walker considered the law of equitable mistake. He stated that under equity a mistake can be set aside if it arises from a “causative mistake with sufficient gravity. A mistake will be causative if disposition would not have been made but for the mistake.” A mistake “must be distinguished from mere ignorance or inadvertence” (at paragraph 104) and “the gravity of the mistake must be assessed by close examination of the facts …. including the circumstances of the mistake and consequences” (at paragraph 126).

He further went on to say that “the test will normally be satisfied only where there is a mistake either as to the legal character of the transaction or as to some matter of fact or law which is basic to the transaction”.

The Judge did grant the mistaken Deputy the equitable remedy, however he warned that such decisions are very unusual and should not be relied upon in the future.

This decision is perhaps against the recent line of cases limiting the extent of Hasting-Bass type rectification decisions. This is particularly so were the catastrophic error was entered into with some comprehension by the beneficiaries that the arrangement was solely to avoid tax and that the tax might not be achieved. An example of such a case is the Ratio Group Services v Ashmore [1995] STC1151, where the company could not show what it would otherwise have done with the money, had it not moved the money so as to seek a tax advantage.

The other common ground for seeking rectification or rescission of a transaction is where there has been undue influence such that it would be inequitable not to set aside the transaction. The leading case in this area is perhaps Royal Bank of Scotland v Everidge [2002] 2AC773.

However, here again the courts are moving away from a jail-free card, as evidenced in the case of Santander v Fletcher [2018] EWHC 2778. In this case a mother transferred half her property to a son, so as to enable him to achieve a loan. She was told the loan was to be £32,000. In fact, he borrowed £120,000 and charged the now jointly owned property. The Santander mortgage was then defaulted and they sought possession of the property. The court in that case did not allow a rescission on the basis of undue influence, although there clearly was undue influence. This was because although the loan itself may well have been entered into under undue influence, the transfer of the property before that was with the mother’s consent. The transfer of half the property to a son was not proven to have been undertaken through undue influence.

Perhaps if the matter had been pleaded as a fraud or the circumstances around the earlier transfer into joint names had been sufficiently explored at trial, then on appeal the decision might have been different.

In conclusion, when there has been a mistake, it is best first to look carefully whether the mistake can be rectified and the original transaction rescinded or corrected. The courts are, however, reluctant to do that and the circumstances in which it can be achieved are becoming limited. As such, it is an onerous task to satisfy the criteria. The Santander case illustrates that it is essential to present the case correctly, a specialist task.