Analysis
The claimants, who were father and son, farmed together in partnership Seamer Grange Farm. They were advised to place this property in trust and that there would be no capital gains tax chargeable on the transfer. The first claimant, who held the legal title, transferred the partnership land to the trustees of a discretionary trust which was created by a trust deed dated 24 June 2011. Unfortunately, the advice which they had been given was incorrect; capital gains tax was exigible on the transfer, amounting to more than £200,000 plus interest and possible penalties. The claimants and defendant sought relief by applying to the court to set aside the transfer on the ground of mistake. At the hearing on 25 September 2015 permission was given to the claimants to re-amend the claim form and particulars so as to add similar claims to set aside two further transfers of land into the same trust; those of Harker Hill, the legal title of which was held by the second claimant, and Fox Covert, the legal title of which was held jointly by the claimants. Both parcels of land belonged beneficially to the partnership although, by the time that the claim was heard, they had been sold by the trustees and a large proportion of the net proceeds had been used to acquire new farming land at Seamer Grange and Village Farm. The balance of the net proceeds was used to pay stamp duty land tax and the legal costs of the transactions, and then to satisfy partnership liabilities. At the conclusion of the hearing, the decision was given, together with oral reasons, to rescind (set aside) on the ground of mistake the transfer of land known as Seamer Grange Farm. The decision on the re-amended claim as regards the additional parcels of land was made on the papers, without a further hearing.
Held (allowing the claim):
There was no doubt that the same operative mistake affected the transfers of both Harker Hill and Fox Covert as the transfer of Seamer Grange Farm. This was not mere forgetfulness, inadvertence or ignorance (though those causes could lead to a false belief or assumption which would be recognised as a mistake) or a mis-prediction relating to a possible future event. The claimants had not deliberately run the risk of making the mistake, that is as to whether capital gains tax would be payable on the transfer, and it was sufficiently grave – being basic to the transaction – that it would be unconscionable or unjust to leave it uncorrected. Moreover, there were no effective bars to rescission. As regards the point that relief was being sought only in relation to part of the property transferred into trust, authority that there could not be a partial rescission of a contract was limited to a contractual context and should not apply to a self contained and severable part of a non-contractual voluntary transaction. In the present case, the three transfers were each self contained and entirely severable from the other. As regards the point that the additional parcels of land had been sold to bona fide purchasers and therefore no rescission that resulted in the rights belonging to those third parties being restored to the claimants, that was not a bar on other rights being so restored and, in the present case, they were not seeking the court’s ordering those purchasers to hand back those parcels of land. If rescission was viewed as a proprietary base by avoidance (ie a foundation for a claim to other property than that which was originally transferred), then the right to rescind was an equity which attaches to the property in whosoever’s hands it may be, unless and until it comes into the hands of a bona fide purchaser for value without notice. This right to rescind enabled a tracing remedy to be applied so as to attach to the net proceeds of sale which were used in the purchase of the new land. It was not confined to cases of fraudulent misrepresentation but extended to cases of causative and basic unilateral mistakes. In principle, the beneficial ownership of the new land should be divided between those who were entitled to Harker Hill and Fox Covert in proportion to the values that each parcel bore to the total value of both parcels of land at the date when they were sold out of the trust and turned into proceeds of sale. As regards the effect of rescission, the default position was that, if a certain act or event is held not to be valid and effective under the general law, it should not be treated as a taxable act or event either. The taxation consequences of the transfer being set aside (eg whether rollover relief was available on the basis that the proceeds of sale were reinvested in new land to be used for the purposes of the farming business) were matters for the parties to resolve with HMRC. With regard to the question whether the claimants would have acted in the same way as the Trustees in selling those parcels of land and reinvesting the net proceeds in the purchase of new land, by the very fact of bringing this claim to rescind, the claimants must be treated as having elected to ratify what the trustees had done. Thus, once the transfers into trust are treated as never having happened, the claimants would have retained Harker Hill and Fox Covert, and the subsequent sales and application (by the trustees) of the net proceeds to reinvest in the new land and to pay stamp duty land tax, legal costs and other liabilities of the business are to be imputed to them as original owners.
Introductory [1] These are the reasons for my decision in the second part of this claim, concerning land known as Harkers Hill and Fox Covert. The first part of the claim concluded with my decision, given together with oral reasons, at the hearing on 25 September 2015, to rescind (set aside) on the grounds of …Continue reading "Bainbridge v Bainbridge [2016] EWHC 898 (Ch)"