A Textbook Example

A solicitor and a barrister were both negligent to suggest a discretionary settlement, ruled the Chancery Division in Estill and others v Cowling Swift & Kitchin and Carswell.

A CONTROLLING SHAREHOLDER with 1,100 shares wished to give 100 each to her five nephews and nieces without enabling them to interfere in the management of the company. Her solicitor suggested that a discretionary trust might be appropriate. He sought the advice of counsel who endorsed the idea. Neither realised that a discretionary trust would incur inheritance tax of some £185,000 whereas an interest in possession trust would not, and the settlor was shocked at the tax charge. The Chancery Division held that both the solicitor and the barrister were negligent, and both owed a duty of care to the settlor and the trustees.

Background

Mrs Estill, a widow, was 82 and the controlling shareholder in a private company which owned agricultural and residential land worth about £1.2 million. She held 1,100 of the 1,120 issued shares. She had no children and wished to give each of her five nephews and nieces 100 shares. She did not want them to interfere with the management of the company while she or either of the then directors (aged 80 and 46) were alive. Like many clients, she had an 'ingrained aversion' to the payment of tax.

In early 1988, Mrs Estill asked a partner in the defendant firm of solicitors to advise her on the matter. It was clear that she did not want to pay a large amount of tax on any gift she might make, but was not worried about tax liabilities arising after her death. Although the solicitor was accustomed to wills and trusts work, this was no more than 15 per cent of his workload and he sought the advice of counsel (the second defendant) for Mrs Estill on the following matters:

'1. How Mrs Estill's wishes can best be implemented and on the nature and form of any trust which counsel may suggest in this connection.

'2. What steps can be taken to diminish the risk of litigation or of the professional trustees being open to attack.

'3. What is the optimum time limit for any trust to operate and what capital taxes are payable on the appointment or distribution of capital during or at the end of the trust period.

'4. Generally.'

The instructions referred to tax implications, but stated that tax saving was not Mrs Estill's primary concern. They referred to the provisions of her will which would, taken with the gifts contemplated, give the nephews and nieces control of the company and suggested that a discretionary trust might be appropriate.

Counsel read the instructions as asking him to advise generally. He endorsed the idea of a discretionary trust without giving any reasons, although he suggested some alternative ways of framing this, including an accumulation and maintenance trust. Although he dealt with the inheritance tax régime covering the taxation of discretionary trusts in a paragraph which bore a close resemblance to one in Tolley's Tax Planning (actually part of a chapter written by Malcolm Gunn, the editor of Taxation), he did not explain that the gift into such a trust would be an immediately chargeable transfer and not potentially exempt.

The solicitor was not up to date with the ins and outs of inheritance tax and was unaware of this fact. He thought that the gift to the trust was a potentially exempt transfer. He discussed the advice with Mrs Estill and returned to counsel, who drafted a discretionary trust which was executed by Mrs Estill in 1988. The settlement did not reflect Mrs Estill's initial wishes in at least two ways: the beneficiaries were not limited to her nephews and nieces, and the beneficiaries were not given fixed interests. The creation of the settlement was not reported to the Inland Revenue and no tax was paid. The solicitor was paid for his professional services in respect of the settlement, which included advice on inheritance tax.

In 1990, Mrs Estill changed her solicitors and it became clear that a tax charge of some £185,000 was payable. Mrs Estill paid this but she was shocked at the amount of tax due and adamant that, had she known of this, she would not have created the settlement.

Mrs Estill died in 1994. Her executors and the trustees of the discretionary settlement brought an action in professional negligence against her previous solicitors and counsel. It was claimed that she suffered loss because the gift of shares was not to an interest in possession trust or, alternatively, because it was not made following a reorganisation of the rights attached to the shares. The potential loss was agreed between the parties at £170,000.

Judgment in the Chancery Division

Mrs Justice Arden decided four points.

First, both defendants owed a duty of care to the trustees as well as to Mrs Estill. The instructions to counsel clearly covered this point. The fact that the trustees had not been finally selected at the stage advice was given, did not mean that advice could not be sought on their behalf.

Second, the solicitor owed a duty of care to Mrs Estill. She was elderly and without any detailed knowledge of tax and trust law. The advice given was not outside the solicitor's retainer. In the judge's view, the solicitor gave preliminary advice that there was no inheritance tax charge on creating the settlement, but this advice was subject to counsel's advice. The solicitor undertook to instruct counsel, that is to prepare adequate instructions for counsel and check that the instructions given and the advice received covered the matters on which Mrs Estill required advice. In addition, the solicitor by implication undertook to review the advice with the benefit of his legal knowledge, albeit without the specialist knowledge that counsel would be expected to have.

The solicitor undertook to do all these things with the care to be expected of a reasonably competent solicitor and he could not rely on counsel's opinion to relieve him of any responsibility. A reasonably competent solicitor would have taken steps to obtain some general knowledge of the subject. The point was not obscure: it was a general principle of inheritance tax. If he had undertaken simply to relay Mrs Estill's questions to counsel and forward his advice back to her, he would have required an express agreement to that effect: see Hurlingham Estates Ltd v Wilde & Partners [1997] STC 627. It followed that loss flowed from the solicitor's breach of duty.

A subsequent act of negligence does not exonerate the original offender; it was not open to the solicitor to say that counsel's negligence was the sole cause of the loss. In the well-known case of Burrows v March Gas & Coke Co [1872] LR 7 Ex 96 the gas company supplied a defective gas pipe, but the immediate cause of an explosion which caused damage was a negligent third party, a gas fitter, who searched for the source of the escape of gas with a lighted candle. The company was held liable.

Third, counsel also owed a duty of care to the solicitor. The relevant standard of care to be expected was that of a reasonably competent barrister in general Chancery practice; that is, having (among other things) experience in tax and trust matters. He should not, however, be expected to have the knowledge and experience of a barrister specialising in tax matters. The barrister fell short of the relevant standard of care by failing to advise expressly that the gift of shares to the settlement would be an immediately chargeable transfer, and was therefore negligent. That failure caused the claimants' loss. His instructions required him to consider alternative methods of achieving Mrs Estill's wishes, given the serious adverse tax consequences of a discretionary trust. He did not consider an interest in possession trust. A reasonably competent barrister would have done so, and put the suggestion forward.

Fourth, the solicitor and the barrister were both negligent in relation to the advice they gave to Mrs Estill and the trustees with respect to the settlement. If they had not been negligent, Mrs Estill would have set up an interest in possession trust, rather than a discretionary settlement, and would have saved inheritance tax accordingly.

Commentary by John Jeffrey-Cook FCA, FTII, FCIS, ATT

This case has received surprisingly little attention in the professional tax press. It gives out a strong reminder that those who are not competent to give tax advice should refrain from doing so. Too many practitioners when asked if they will advise say 'yes' when they ought to say 'no, this is not my area of expertise'.

Solicitors and chartered tax advisers may have thought that obtaining counsel's opinion would put them in the clear, but in Ridehalgh v Horsefield [1994] Ch 205, CA, Sir Thomas Bingham, Master of the Rolls, endorsed the guidance given on this subject in Locke v Camberwell Health Authority [1991] 2 Med LR 249. A solicitor does not abdicate his professional responsibility when he seeks the advice of counsel. He must apply his mind to the advice received. But the more specialist the nature of the advice, the more reasonable is it likely to be for a solicitor to accept and act on it.

The guidance given in the Locke case as to the principles deducible from the authorities and relevant in that case was as follows:

• In general a solicitor is entitled to rely upon the advice of counsel properly instructed.
• For a solicitor without specialist experience in a particular field to rely on counsel's advice is to make normal and proper use of the bar.
• However, he must not do so blindly but must exercise his own independent judgment. If he reasonably thinks counsel's advice is obviously or glaringly wrong, it is his duty to reject it.

The scope of a solicitor's duty of care depends on the client's apparent need for advice: Caradine Properties Ltd v D J Freeman & Co [1982] 126 SJ 157. Mrs Estill was elderly and without any detailed knowledge of tax or trust law. The solicitor owed a duty to take a broad view of the scope of his retainer. The solicitor should at the time in question have known that, in general, transfers into discretionary settlements were not potentially exempt transfers, but that transfers to interest in possession trusts were. He should also have known that, as a matter of trust law, the company would treat the trustees as registered holders of shares as the absolute owners and that under an interest in possession trust the beneficiaries could not interfere in the way that the trustees exercise the voting rights: see Re Brockbank [1948] Ch 206; Re George Wichelow [1954] 1 WLR 5.

To carry out what he had undertaken to do, a reasonably competent solicitor would, in the judge's view, have taken steps to give himself some general knowledge of the subject. In other words, as respects the tax considerations, he would have read some general outline of the tax implications of setting up a trust, and (having discovered that inheritance tax applied to all transfers of value, subject to exemptions) looked to see what exemptions were available. The point was not some obscure point of tax law. It was a basic principle of inheritance tax which had been discussed in the professional press at the time, particularly when the law was changed to make transfers to interest in possession trusts potentially exempt transfers. As it was, the solicitor did no research of his own.

And what of counsel? The barrister was not a novice but was called to the bar in May 1968 and had a mixed commercial/Chancery/tax practice. The judge found no less than 11 shortcomings in the barrister's opinion. The barrister admitted that the paragraph dealing with the inheritance tax treatment of a discretionary trust that had been set up was copied word for word from Tolley's Tax Planning. This was an accurate summary but the reader needed a basic knowledge of inheritance tax. Tolley's Tax Planning is for advisers who already have a knowledge of the basics. The judge was satisfied that, by failing to advise expressly that the gift of shares to a discretionary settlement would be an immediately chargeable transfer, the barrister fell short of the relevant standard of care and was negligent.

Sadly, a little knowledge is a dangerous thing.

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