Tax Case

Another Abacus case

In Abacus Trust Company (Isle of Man) Ltd v National Society for the Prevention of Cruelty to Children [2001] STC 1344, the rule in Hastings-Bass was held to apply to a tax-avoidance scheme which had been improperly executed by trustees. Readers will recall that the rule enables a trustee's appointment to be set aside if the trustee acted without due consideration of all relevant matters.

It appears that the successful application of the rule in that case led the same trust company to seek advice in another case where an appointment had been made under a misapprehension. The case concerned a settlement dated 13 April 1992 in which the settlor had an initial life interest. The trustees had powers to appoint all or any of the funds on discretionary trusts for the family of the settlor and immediately after the settlement was made, the settlor expressed a wish that 40 per cent of the trust fund should be appointed on these discretionary trusts, leaving the remaining 60 per cent under the existing life interest trusts. In fact, owing to a mistake in the transmission of the settlor's wishes to the trustees, the trustees thought that the settlor wanted 60 per cent of the trust fund to be appointed on discretionary trusts and they therefore executed a deed of appointment on 22 April 1992 to this effect. When the mistake was discovered in August 1992, the settlor expressed his dissatisfaction but it was decided that the tax consequences of reversing the appointment meant that all parties would have to live with the deed as executed.

From 1996 onwards, distributions of capital and income were made to sons of the settlor amounting in total to approximately £400,000.

In November 2001, Abacus took advice concerning the 1992 appointment and this was to the effect that the appointment was open to challenge under the rule in Hastings-Bass. The case was therefore brought before the High Court in January this year.

Counsel for the settlor made the bold contention that the mistake which occurred rendered the appointment of 22 April 1992 totally void, with the result that, following an order by the Court to this effect, the trustee would be entitled to recover from the sons the payments made to them since 1996. Counsel for the sons argued that the appointment was merely voidable as a result of the mistake, so that it should be declared void as from a current date and not retrospectively to April 1992.

Mr Justice Lightman considered firstly that the trustees' mistake was sufficiently fundamental to bring the rule into play. However, it could not be said that the trustees failed to identify all the relevant considerations before executing the 22 April 1992 appointment. They had appreciated that the settlor's wishes were a factor to take into account. The error was in the transmission of the settlor's wishes to the trustee, and, on this analysis, there was no error by the trustee itself.

However, Mr Justice Lightman did uphold an alternative contention which was that the trustee failed to take adequate measures to ensure that it received a correct version of the settlor's wishes. The person who conveyed the settlor's wishes to the trustee was within the wider business structure of the trust company and accordingly it could be said that the trustee was responsible for the default.

The final issue was whether the appointment was void ab initio, or whether it was merely voidable by order of the Court. It was held that in the circumstances of the case, and particularly in view of the substantial distributions already made to the sons, the appointment should be declared voidable. It was left to the parties to reach agreement on whether or not the appointment should now be avoided and, if so, on what terms.

No doubt the inheritance tax consequences of declaring the appointment void at this stage will be a significant factor for all the various parties to take into account.

(Abacus Trust Company (Isle of Man) and Colyb Ltd v Barr and two others, High Court, Chancery Division, 6 February 2003.)

Issue: 3899 / Categories: