Mistake and rectification

When Peter Robin Hood Hastings-Bass died, he gave rise to the principle that robbing the rich - the Inland Revenue in those days - to assist the relatively poor - his family - could be successful, and any inadvertent mistakes along the way could be glossed over and remedied (see Hastings-Bass (deceased) v IRC [1974] STC 211).

If there is a mistake, for example by the trustees in executing a deed of appointment on the wrong day, it may be possible to apply to the court to have the document declared void ab initio, as happened in the case of Abacus Trust Co (Isle of Man) Limited v National Society for the Prevention of Cruelty to Children [2001] STC 1344, where the trustees were entering into a tax-avoidance flip-flop scheme, the final part of which had to take place after 5 April 1998.  The deed of appointment was executed by the trustee on 3 April 1998, contrary to the advice of counsel, and the court held that, as the trustees were obliged to take into account the fiscal consequences of their actions, they could not have meant to sign the deed of appointment on 3 April, and it was therefore void.  The Hastings-Bass principle was further applied in Burrell and another v Burrell and another [2005] EWHC 245 (Ch); Mettoy Pension Trustees Limited v Evans [1991] 2 All ER 513, and other cases.  The relief is not, however, automatic (Breadner v Granville-Grossman [2001] Ch 523, [2000] 4 All ER 705). 

However, the Supreme Court in Pitt and another v Holt and another and Futter and another v Futter and others (2013) STC 1148, considered and redefined the rule in Hastings-Bass, which depended on the trustees’ breach of duty in the performance of something which was within the scope of their powers, not in doing something which they had no power to do at all.  Therefore, in order for their actions to be set aside, the inadequacy of the trustees’ deliberations had to be sufficiently serious as to amount to a breach of fiduciary duty in order for the court to intervene.  If the trustees, acting within the scope of their powers, followed professional advice which turned out to be wrong, the court would not set aside their decisions.  A mistake as to the tax consequences of the actions taken, as opposed to a mistake as to the legal character or nature of a transaction, could not be set aside.

In Futter, the solicitor trustee was not in breach of his fiduciary duty as a result of incorrect tax advice from a member of his firm.

In Pitt v Holt, Mrs Pitt, as receiver of her incapacitated husband, was in a fiduciary position but had not failed in her duty when the professional advice she had relied on turned out to be wrong.

Both appeals were therefore dismissed so far as they relied on the Hastings-Bass rule.  However, Lord Walker considered whether a mistake had been made, stating ‘forgetfulness, inadvertence or ignorance is not, as such, a mistake, but can lead to a false belief or assumption which the law will recognise as a mistake’.

With reference to mistakes about tax, HMRC’s assertion that such a mistake cannot in any circumstances be relied on was rejected, and IHTA1984 s150 was referred to, which encompasses transfers set aside as voidable or otherwise defeasible.

The Supreme Court refused to allow the appellants in Futter v Futter to raise the issue of mistake for the first time on a second appeal and it was ‘hardly an exercise in good citizenship’, being a tax avoidance scheme which had gone wrong.

In Mrs Pitt’s case there was only £6,259 left in the trust on Mr Pitt’s death.  HMRC’s objection to setting aside the SN trust was not accepted and the trust was set aside on the grounds of mistake.

This subject is covered in more detail in Tax Adviser’s Guide to Trusts (Fifth Edition) to be published in February by Bloomsbury Professional. For further information, visit: http://www.bloomsburyprofessional.com/uk/tax-advisers-guide-to-trusts-9781780436081/

 

Nigel Eastaway OBE is a Tax Partner at MacIntyre Hudson. He is an expert on share valuations, forensic matters and the taxation of intellectual property and has acted as an expert witness on a number of well-known cases.

He is co-author of Tax Advisers’ Guide to Trusts (5th Edition) and Practical Share Valuation (6th Edition).

Written by Ellie MacKenzie

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