If I Could Turn Back Time: Rescinding trust instruments on the basis of mistake

Summary

Two recent High Court cases have considered the principles underpinning the Court’s power to set aside or rescind a voluntary disposition on the grounds of mistake. In the cases of Hartogs v Sequent (Schweiz) and Payne v Tyler, the Court exercised its discretion to set aside the dispositions in question where there had been a mistake as to their tax consequences.  

The law of rescission on the grounds of mistake

In Pitt v Holt [2013] UKSC 26, the Supreme Court outlined a three-stage test for determining whether a voluntary disposition can be rescinded on the grounds of mistake.

1. The donor must have been mistaken: there must be a distinct mistake rather than forgetfulness, inadvertence or ignorance.
2. The mistake must be of the relevant type: the mistake must be a causative mistake. This will usually relate to either the legal character or nature of the transaction, or some matter of fact or law which was basic to the transaction. 
3. The mistake must be sufficiently serious: this means it must be a mistake of so serious a character as to render it unjust for the donee to retain the property.

If these three requirements are met then the Court must ask itself whether, in all the circumstances, viewed objectively, it would be unconscionable to allow the mistake to go uncorrected. This will be assessed by a close examination of the facts, including the circumstances of the mistake, its centrality to the transaction in question and the seriousness of its consequences.

Hartogs v Sequent (Schweiz)

The Claimant sought to rescind two voluntary transfers into non-UK trusts which had been made on the basis of erroneous professional advice that these structures would provide a tax efficient means of holding his assets. In fact, the advice failed to take into account that the Claimant had lost his non-domicile status and therefore the transfers resulted in immediate adverse inheritance tax consequences.

The Court allowed the claim after considering the principles in Pitt v Holt, bearing in mind the following factors:

• The transactions in questions were not controversial tax-planning schemes.
• The whole purpose of the transactions was directed to holding assets in a tax-efficient manner.
• The Claimant had followed advice and had been mistaken as to the consequences of doing so.
• It would therefore be unconscionable for the Claimant to bear the substantial immediate tax charges.

The Court also highlighted that there is no reason why a mistake as to tax consequences should be treated differently to any other mistake.

However, the Court was keen to stress that this should not be viewed as a “get out of jail free” card, which might be invoked whenever a taxpayer found themselves with a charge to tax they had not anticipated. There were strict limits on the circumstances in which a transaction might be set aside on the grounds of mistake.

Payne v Taylor

Trustees had executed a deed of appointment on the basis of specialist tax advice that had stated that there would be no adverse tax consequences as result of the appointment. This advice was incorrect and the trustees sought to rescind the appointment on the grounds of mistake.

Again, the Court allowed the rescission on the following basis:

• There had clearly been a mistake. The trustees had exercised their power of appointment on a mistaken basis. The trustees had asked the right question of the right person and got the wrong answer.
• Although the mistake was not one as to the legal character of the transaction, it was still a relevant type of mistake. It went to the core of the deed of appointment. The purpose of the trust’s existence had been to ensure that property derived from the estate of the original settlor fell outside the estate of the beneficiary to whom the property had been appointed (which was an unexceptional piece of tax planning). The deed of appointment disturbed this position. Granting the trustees the relief simply restored them to a position that the tax legislation permitted them to be in.
• Had the trustees been advised correctly, they would not have entered into the appointment. The amount of tax at stake was significant, especially by reference to the value of the trust fund (40%).

Comment

Both cases provide valuable clarification as to the principles to be applied when seeking to rescind or set aside a voluntary disposition on the grounds of mistake, especially in the context of incorrect tax advice.

Mistakes as to tax consequences are clearly capable of being relieved. It also does not matter if granting relief would serve no practical purpose other than saving tax. Potential claimants should, however, be aware that making a claim in mistake is not a “catch all” solution to an unexpected tax bill: the criteria in Pitt v Holt must still be met.

Payne and another v Tyler and another [2019] EWHC 2347 (Ch.)

Hartogs v Sequent (Schweiz) AG and others [2019] EWHC 1915 (Ch)