Havoc can ensue where a trustee is not effectively discharged on retirement, particularly if the defect goes unnoticed for a number of years.

The difficulties that can arise were highlighted in Jasmine Trustees Ltd and other v Wells & Hind (a firm) and another [1]. A husband and wife, Major-General and Mrs Coaker (the 'Coakers'), created a settlement in 1968, of which they were the original trustees. They were UK resident and executed a deed of retirement in 1982 (the '1982 Deed'), appointing two new non-UK resident trustees, so as to transfer the trust offshore for UK tax purposes.  

The two new trustees were a company and an individual. Although it was ruled they were validly appointed, the Coakers as outgoing trustees could not be discharged and unwittingly remained trustees of the settlement. This is because the prevailing legislation required at least two individuals (or a trust corporation) to be appointed in place of the retiring trustees [2], and 'individuals' could only mean natural persons and not a company. The two new trustees undertook their trustee duties under the misapprehension that they were the only trustees of the settlement. Their exercise of various trustee powers was invalid, including the appointment they made in due course of successor trustees, as all four trustees (i.e. the Coakers and the new trustees) were required to join in. 

Amending legislation was introduced in The Trusts of Land and Appointment of Trustees Act 1996, when the requirement in the statute as to the nature of the trustees was changed to refer to 'two persons', instead of 'two individuals', 'person' being defined as either a company or an individual. This amendment did not, however, have any retrospective effect so as to remedy defects in earlier appointments.

In Jasmine a defect in the deed of retirement meant a whole series of acts were undertaken by the two new trustees and their ostensible successors over the years. The invalid actions included the purported exercise of powers to postpone the interests of two beneficiaries beyond the age of 21.    

This oversight also had devastating tax implications. The trust was not exported, as the Coakers anticipated when executing the 1982 Deed, and remained UK resident until Major-General Coaker died in 1983. On his death, the majority of the trustees were based offshore and the trust was therefore inadvertently exported, with a charge to capital gains tax [3]. It was subsequently automatically repatriated to the UK on the death of an offshore trustee in 1989 and exported again on Mrs Coaker's death in 1996.  

In 1987, the problem appears to have come to light and an attempt was made to rectify the appointments. It was, however, only in 2002, some twenty years after the execution of the 1982 Deed that proceedings were issued for professional negligence against the firms that had advised on the retirement and appointment of trustees over the period. The claim for damages was for the amount of capital gains tax arising as a result of exporting of the trust.

Mann J, in his judgment, considered the status of the various trustees who had been invalidly appointed over the years. It was agreed that these ostensible trustees were 'trustees de son tort' and several aspects of their role and duties were explained: 

  • A trustee de son tort is not a 'trustee of the settlement' under the capital gains tax legislation [4].
  • A person whose appointment is defective will hold the trust property on bare trust for the real trustees.
  • Any gains made by the trustee de son tort accrue to the 'real' trustees.
  • On discovering a mistake in an appointment the 'real' trustees can make a new appointment to regularise matters, or can call for the trust property to be re-vested in them [5].
  • Capital gains tax is a tax on gains which accrue to the actual trustees of the settlement as a body. It is not a tax on the persons who make the disposal, even though the actual trustees may not have control over the assets and may be unaware of the disposal.
  • The exercise of dispositive powers by invalidly appointed persons could not be held to be effective.
  • A trustee de son tort, is a 'kind of constructive trustee', having some of the attributes of a constructive trustee, and the statutory duty of care applies.

A deed of retirement may be defective for a number of reasons, such as defects in the document itself, invalid execution or failure to appoint the correct number of incoming trustees. The longer any such defect goes unnoticed, the more drastic the potential implications.

This article by Amanda Edwards first appeared in the STEP Journal in June 2014.