Analysis
In 2001 the claimant purchased a house (St Leonard’s Close) with the assistance of a loan from her father. In 2004-5 the claimant’s father agreed to forego the loan. In 2010 the claimant moved out of St Leonard’s Close and into rented accommodation. The claimant wished to buy a different house (Gibbs Green) but she had difficulty selling St Leonard’s Close. Her father therefore agreed to lend her sufficient funds to cover the purchase price of £525,000 and the acquisition costs of £5,000 in respect of Gibbs Green. The claimant’s father made clear, and the claimant agreed, that this was a loan which was to be repaid at least in part from the sale of St Leonard’s Close with any balance to be left outstanding for the foreseeable future. The claimant’s father was motivated by a desire to act fairly to his children, and he felt that giving the claimant the money for two houses outright would be unfair to the claimant’s siblings.
The claimant completed the purchase of Gibbs Green in September 2012, but she remained unable to sell St Leonard’s Close. Her father therefore suggested that she place St Leonard’s Close and Gibbs Green into a trust.
On 4 February 2013 the claimant settled St Leonard’s Close and Gibbs Green upon trust, the terms of which gave a life interest to the claimant subject to a power of appointment in favour of a discretionary class comprising the claimant, her son (the third defendant), the children of the claimant’s parents and their issue and such other persons or charities that might be added. Subject thereto the capital and income was held upon trust for the third defendant.
The trust was created upon the advice of the claimant’s father and a solicitor. The aim was to protect the assets settled from the claimant’s past or future partners, and to ensure that the claimant could not retain both properties for her own benefit. It remained the position that the claimant would repay her father’s loan out of the proceeds of St Leonard’s Close. The claimant’s evidence was that she was not concerned about the precise details of what was involved and did not consider that the creation of the trust might have taxation consequences or other disadvantages for her.
The claimant (and her advisors) failed to appreciate that the transfer of assets into the trust would be a lifetime chargeable transfer for inheritance tax purposes, which would incur a charge of approximately £156,000. There was also a failure to appreciate that there would be ten-yearly charges and exit charges. These tax charges would prevent the claimant from repaying her father from the proceeds of sale of St Leonard’s Close.
The claimant applied for an order that the settlement be set aside on the ground of equitable mistake. All of the parties supported the claim, with the exception of the Commissioners for Her Majesty’s Revenue and Customs who opposed it.
Held (setting aside the settlement on the ground of equitable mistake):
- 1) In order for relief to be given there must be a distinct mistake, a serious mistake, and it must be unconscionable not to set the settlement aside. In addition, it is likely that relief will not be given if the transaction is part of a tax avoidance scheme.
- 2) The claimant had made a distinct mistake, which was not a mistake based upon ignorance or a disappointed expectation. She received wrong advice and it was entirely reasonable for her to say that based on that advice she broadly understood that there would be no adverse tax consequences for her in entering into the settlement.
- 3) The claimant’s mistake was sufficiently serious. The tax consequences had the effect that the loan from the claimant’s father could not be repaid. The settlement was so affected by the tax consequences that its effect was entirely different from that which the claimant believed it to be.
4) It would be unconscionable not to set the settlement aside. The claimant made a distinct and serious mistake. The settlement was not created for the benefit of the beneficiaries but to protect the claimant, who had a large tax liability which affected her ability to repay the loan which she took on the basis that it would be repaid. Taking the matter in the round, it would be unconscionable for the donees to profit from that mistake and insist on their rights under the settlement.
JUDGMENT PROUDMAN J: [1] This is an application made by Part 8 claim for an order that the above settlement dated 4 February 2013 and made between the claimant of the one part and the first and second defendants of the other part be set aside on the ground of equitable mistake. [2] Various representation …Continue reading "Freedman v Freedman & ors [2015] EWHC 1457 (Ch)"