TRUSTS; ARTICLE 47E; MISTAKE BY “SETTLOR”
Representation of Fiduciary Trust Limited re E Trust [2024] JRC 168
Pursuant to Article 47E of the Trusts (Jersey) Law 1984, the Court considered an application to set aside a transfer of assets into trust made as a result of a UK tax mistake.
The transfer of assets had been effected by documents executed by two Jersey companies holding certain UK real property, originally provided by the settlor. The effect was that the properties registered in their names were held as nominee and bare trustee for the trustee of an existing Jersey discretionary trust settled by the settlor. The companies were also owned by the trustee and had directors provided by the trustee. The trustee and the settlor sought an order that the declaration of bare trust be set aside by reason of the tax mistake and take effect as a bare trust for the settlor absolutely ab initio, as well as certain consequential relief. Such relief would not affect the validity of the discretionary trust itself, nor the other assets in the trust.
The adult beneficiaries consented. Minor beneficiaries were represented. HMRC did not object and Attorney General was convened by reason of a default charitable interest under the trust. At a directions hearing further parties were notified and evidence or comments sought.
Held:
(1) Application and effect of Article 47E. In the circumstances of this case, the effect of Article 47E was that, in respect of the settlor/trustee in its capacity as trustee and provider of directors controlling the nominee companies, the Court may declare a transfer or other disposition of property to a trust voidable and of such effect as the Court may determine if the settlor/person exercising a power to transfer property to a trust on behalf of a settlor has: (i) made a mistake in relation to the transfer or other disposition of property into trust; (ii) would not have made that transfer or disposition but for the mistake; and (iii) the mistake is of so serious a character as to render it just for the Court to make a declaration under this Article.
(2) Adverse tax consequences. With expert evidence, the Court considered the adverse UK tax consequences of four possible scenarios including setting aside the declaration of trust. Setting aside the declaration of trust would be more tax efficient than all likely scenarios save for the fourth where it would not always be the most tax effective scenario but where, in any event, most of the charge to IHT could be legitimately avoided by the settlor’s spouse making a potentially exempt transfer to other younger beneficiaries on inheriting the properties. In referring to these scenarios the Court pointed out that this did not mean that the Representors were entitled to pick and choose a remedy. It was not for the Court to assist an applicant for relief under the relevant provisions to re-write history so as to create the perfect tax solution ex post facto: Hawksford Trustees Jersey Ltd v P [2021] JCA 201; In the matter of the B Trust [2019] JRC 035; A v Helm Trust Company [2019] 1 JLR Note 4; Re The Grundy Trust [2020] JRC 071. Nonetheless, it was clear that the tax consequences of the structure adopted in this case were in almost all possible future circumstances likely to be to the disadvantage of the beneficiaries, sometimes to their very substantial disadvantage. Indeed, in the event that the properties remained in trust and no further action was taken, their values increased by 5% per annum, the Settlor died in 2038, the properties were not inherited by his spouse and the Trustee sold the properties the following year, the total charges to UK tax would exceed £86 million, whereas the charge to tax would be just over £2 million if the properties had been held directly through a nominee from the outset.
(3) Disposal. The statutory test under Article 47E being met, the orders sought were granted.
Bridgeford A, WDJL 26 August – 1 September 2024