Trusts Equitable Mistake

    July 2015

    The decision of the Supreme Court in Pitt v Holt [2013] UKSC 26 was pretty much the last word on mistake and on the limits of the Hastings-Bass principle.
    Note: the Hastings-Bass principle, established in a 1975 case, concerns the courts' ability to set aside trustees' actions where they have exercised a power, only to discover subsequently that it has produced unhappy results, especially adverse tax implications. Pitt v Holt severely limited the situations where this can be applied, and is discussed in Matthew Hutton's briefing The End of Hastings-Bass? in May 2011 TAXline.]

    In 2014, in the case of Wright v National Westminster Bank Plc [2014] EWHC 3158 (Ch), the High Court reviewed the guidance from the Supreme Court in deciding whether it was able to exercise discretion to rescind a disposition on the basis of a unilateral mistake. The High Court said that such a mistake cannot be a pure question of fact nor can it have arisen out of inadvertence or ignorance. The causative mistake must be so grave that it would be unconscionable for the court to refuse relief.

    The High Court has again considered this principle (and in particular the observation of Lord Walker, who in 2002 wondered why the courts, rather than the parties' professional indemnity insurers, I o I should have to pick up the pieces when a mistake had been made).

    In the case of Freedman v Freedman & Others [2015] EWHC 1457 (Ch), Mr Freedman settled money on his daughter (not for any tax purpose, but purely for personal and family reasons) having been advised that no inheritance tax liability would arise because of the life interest of his daughter. Unfortunately, the advice had overlooked that since 2006 such a gift would be a lifetime chargeable transfer giving rise to an immediate 20% charge. This had such a serious effect on the family's financial situation and their relationships that the High Court thought this was properly described as grave. The settlement was created primarily for the protection of his daughter rather than the other beneficiaries. The large tax liability which arose was extremely serious and the court decided it would be unconscionable for the other beneficiaries to profit from this mistake. The settlement was accordingly set aside on the grounds of equitable mistake.

    This does not break new ground, but confirms the principles established by the Supreme Court in Pitt v Holt which are life-saving in the right circumstances. HMRC opposed the application, not it seems out of any particular wish to disadvantage the applicant, but just to ensure that all the relevant arguments were fully articulated before the court.

    This article first appeared in TAXline July 2015