In a major professional negligence claim, the Court of Appeal has decided it is justified to look behind an investment trust structure in order to set off the tax benefits enjoyed by “end-user” investors against the losses suffered by the trust.  This had the effect of reducing the total damages that the negligent valuers were ordered to pay to the trust.  This decision will be of particular interest to property unit trusts and other structured investment vehicles, where the beneficial investors are intentionally kept separate from the vehicle itself.

In the case of Capita Alternative Fund Services (Guernsey) Ltd & another v Drivers Jonas, Drivers Jonas was at first instance ordered to pay damages of £18.05m for having negligently advised Capita (the “Trust”) on the acquisition of a factory outlet shopping centre located at Chatham Historic Dockyard in Kent.  Capita is structured as an Enterprise Zone Property Unit Trust (“EZPUT”), resident in Guernsey.

Drivers Jonas appealed the ruling on two issues.  One of these issues related to whether credit should have been given for the tax allowances obtained on the purchase price by the individual investors when it came to assessing damages.

The Court concluded that the tax treatment was relevant in the calculation of the damages, even though it was the investors who gained the tax relief and not the Trust.  The key was to view the investment as a whole in determining the losses “really suffered” by investors.  The Court held that, in this case, “where tax considerations were part and parcel of the scheme, it would in principle be wrong to ignore them”.

The Court did emphasise the specific context of the EZPUT scheme, which is known as a “transparent” structure permitting individual investors to take the benefit of tax credits, instead of confining them to the trust in question.

Accordingly, the damages award was reduced from £18.05m to £11.86m.