Analysis
The claimants were the trustees of a number of trusts relating to an English estate, including a fund created by an appointment in 1978 (the T fund). The claim was for rectification or alternatively rescission of a deed of appointment made in 2010 relating to a sub-fund of the T fund. The defendant was the beneficiary of the relevant sub-fund. He did not oppose the claim. HMRC were aware of the proceedings but chose not to take part other than to request that certain authorities be considered by the court.
In 1930, the settlor had settled property on a strict settlement which included a discretionary trust for the benefit of the issue of an ancestor of S ‘s late husband (excluding one branch of the family) and their wives, husbands, widows, and widowers.
By a deed in 1978 (the 1978 deed), certain assets were appointed into settlement for the ancestor for life, with remainder for such children of the ancestor ‘s brother as should attain the age of 40 or be living and under that age on a specified date in various shares (the T fund). The statutory power of advancement was incorporated without restriction to half of each beneficiary ‘s vested or presumptive share. The ancestor died childless in 1988, at which point the default trust came into effect.
Cl 5 of the 1978 deed provided that it should be construed as though s15 Family Law Reform Act 1969 and the Children Act 1975 had not been enacted. Members of the class of beneficiaries therefore only included persons who were legitimate and themselves claimed through legitimate issue.
The T fund was amended by a deed of advancement in 1991 (the 1991 deed). The 1991 deed re-settled the defendant ‘s share and those of two of his siblings into three new sub-funds. The defendant ‘s share was to be held on trust to pay the income to him until the age of 39 with a power to pay or apply the whole or part of the share for his benefit, and then to hold for him absolutely if he attained 39 (the TT fund).
In 2009, in the year preceding the defendant ‘s 39th birthday, the trustees agreed that his life interest should be extended to avoid him becoming absolutely entitled at age 39 to avoid a significant CGT liability. The chief executive of the estate instructed Miss C of A LLP solicitors to prepare the necessary documentation, and she drafted the 2010 deed. It was well known that the defendant had not married his partner and that his children were illegitimate.
The trustees executed the 2010 deed believing that it simply extended the defendant ‘s life interest, that it would enable the trustees to continue apply capital for his benefit and that this included applications to his long-term partner and children despite his not being married to the partner and the children being illegitimate, and that it would not trigger a charge to IHT.
Held (allowing the claim):
The test for whether an appointment by trustees can be rectified for mistake is similar to the four requirements for rectifying a voluntary settlement which are which are summarised at para 4-069 of Lewin on Trusts (19th ed):
- (1) There must be convincing proof to counteract the evidence of a different intention represented by the document itself;
- (2) There must be flaw (ie an operative mistake) in the document such that it does not give effect to the settlor ‘s intention;
- (3) The specific intention of the settlor must be shown – it is not sufficient to show that the settlor did not intend what was recorded, it must also be shown what he did intend; and
- (4) There must be an issue capable of being contested between the parties affected by the mistake notwithstanding that all of them consent.
The burden is on the claimant to show the specific intentions of the trustees which, owing to a mistake in the recording of those intentions and the drafting of the instrument, were not recorded or mis-recorded in that instrument. The evidence must show ‘with some degree of precision ‘ what was intended but the trustees need not have specified any precise form of wording.
Historically, a general intention to achieve a fiscal objective was insufficient, but the court was ‘unconvinced ‘ that this had survived Pitt v Holt [2013] WTLR 977 ([2013] 2 AC 108). The ‘true ‘ focus should be on whether the evidence proves an intention to include specific words or achieve a specific intention which is not achieved due to a mistake in the drafting.
The court must also be persuaded that the effect of leaving the mistake unrectified is unjust but should make the minimum of changes possible to correct the mistake.
The trustees ‘ intention in executing the 2010 deed was to extend the defendant ‘s life interest. This was evidenced by similar appointments they had made to the defendant ‘s siblings, their instructions to A LLP, a decision of a meeting of the trustees, and the first claimant ‘s evidence.
The 2010 deed had various consequences which were contrary to the trustees ‘ beliefs about its effects:
- It included a more restrictive power of appointment compared to the 1991 deed which prevented the trustees from using the TT fund to benefit the defendant ‘s partner and children;
- It did not permit the trustees to resettle the capital for the defendant ‘s benefit, and particularly not onto trusts for his partner and children;
- It terminated the defendant ‘s qualifying interest in possession (IIP) for IHT purposes and therefore triggered immediate and future IHT charges. In particular, since the defendant ‘s new interest was not a transitional serial interest, his share of the fund was exposed to a 20% charge, and the fund itself became relevant property and potentially exposed to decennial charges under s64 Inheritance Tax Act 1984. In addition, as the defendant was entitled to a non-qualifying IIP, he was treated as having reserved a benefit in it, potentially exposing the fund to 40% IHT on his death, and since he did not hold a qualifying IIP there would be no tax-free uplift for CGT purposes on his death.
It was difficult to see how much further the effect of the 2010 deed could have been from that intended by the trustees. It restricted the power of advancement so that the trustees could not benefit the defendant ‘s partner and children, and also triggered immediate and future tax consequences.
In fact, it would have been possible to achieve the trustees ‘ intentions by extending the defendant ‘s life interest without terminating it (following Holmden v IRC [1968] AC 685 and DC v AC [2016] EWHC 477 (Ch)).
It was also clear from an internal memorandum from the solicitors ‘ firm that they had not appreciated the effects the 2010 deed would have on the power of advancement.
The court could not be satisfied that the 2010 deed could be construed so that the word ‘children ‘ extended to the defendant ‘s illegitimate children given the terms of the 1978 deed. In any case, the fact that such a construction was ‘theoretically possible ‘ did not preclude rectification. Construction alone would not cure the other flaws in the 2010 deed.
While there was delay in bringing the proceedings, this was understandable in the circumstances. The true position did not emerge until the trustees instructed new advisors who in turn had to consider the 2010 deed and correspond with HMRC.
Save for HMRC, who would receive an unintended windfall if the mistake were not corrected, no third parties were adversely affected by rectification. HMRC had declined an invitation to be made a party.
There were contestable issues in respect of the restrictions on the trustees ‘ powers which might cause an issue between legitimate and illegitimate children and between spouses and the defendant ‘s partner.
In the circumstances, rectification should therefore be ordered.
JUDGMENT Shuman M: [1] The claimants bring a claim by Part 8 claim form seeking rectification or in the alternative rescission of a deed of appointment dated in 2010 (the 2010 deed). The claim is supported by a witness statement from the first claimant. [2] The claimants are the current trustees of a number of …Continue reading "ABC & ors v KJL [2019] WTLR 1101"