Analysis
The first defendant was trustee of two trusts established by the claimant and named The Milky Way Settlement Trust (Milky Way) and the Mercurius Settlement (Mercurius). Each of the second and third defendants was a company wholly owned by the first defendant as trustee. The trusts were established by the claimant following estate planning advice given to him by professional advisers at Attendus Trust Company AG (Attendus).
Milky Way was part of an offshore trust structure, established in 2009 by the claimant to acquire and hold property in England for the occupation of the claimant and his family. He settled funds for the acquisition of the property and for renovation costs. The property was purchased by the second defendant, which gave a licence to the claimant for him and his family’s occupation.
Mercurius was part of a similar offshore structure, established in 2014 to hold the claimant’s classic car collection. The claimant transferred four cars to the third defendant and also transferred funds for the acquisition of a further five cars and restoration costs.
Some years after the structures were put in place, the claimant discovered that he was liable for immediate and substantial inheritance tax charges in respect of the transfers that he had made. He applied to the court for orders that the voluntary transactions be set aside on the grounds of his mistake. The tax charges were unexpected and arose because Attendus had failed to appreciate that, by reason of his long-term residence in the UK by the time that the transactions were put into effect, he was to be treated as a UK domiciliary. Accordingly, although the structures that had been used were commonly used in standard estate planning techniques for non-domiciled residents of the UK, they were not appropriate for the claimant.
The evidence of the claimant was that, had he known about those tax consequences, he would not have entered into the transactions; he would have purchased the property in his name and kept the classic cars. At no time, until after he became aware of the tax charges and took fresh advice, did he ever appreciate that the tax charges would arise. The consequences of his mistakes were that, unless the applications were granted by the court, they would have a serious, unintended and prejudicial impact on his tax liability and personal affairs.
The defendants supported the applications, having sought the views of the adult beneficiaries. Although HMRC had been notified of the applications, it did not take any part in the proceedings.
Held:
The mistake made by the claimant satisfied the test set out by Lord Walker in Pitt v Holt, at para 103, as summarised by Sir Terence Etherton C in Kennedy v Kennedy:
- (1) there must have been a distinct mistake as distinguished from mere ignorance or inadvertence;
- (2) a mistake could still be a relevant mistake even if it was due to carelessness on the part of the claimant, unless the circumstances were such as to show that they deliberately ran the risk, or must be taken to have run the risk, of being wrong;
- (3) the causative mistake must have been sufficiently grave as to make it unconscionable on the part of the defendants to retain the property, which was normally where there was a mistake either as to the legal character or nature of the transactions or as to some matter of fact or law which was basic to them; and
- (4) the injustice, unfairness or unreasonableness of leaving the mistaken dispositions uncorrected was to be evaluated objectively, but with an intense focus on the facts of the case.
Where the test was satisfied, the court had a discretion as to whether to order rescission of the voluntary dispositions, at which stage unconscionability became of the greatest importance.
The judge found that the tax planning schemes entered into by the claimant were uncontroversial and could be described as ‘vanilla tax planning’ for non-domiciliary residents of the UK. The mistakes were sufficiently grave as to make it unconscionable for them to remain uncorrected, even though they were a mistake as to the tax consequences of the transactions. They were causative mistakes and it would be unconscionable for the claimant to be left to bear the substantial immediate tax charges in respect of the transactions. The judge accepted that both transactions were paradigm cases for the invocation of the Pitt v Holt jurisdiction.
In relation to the 2014 transaction, however, by that time the claimant had been informed by his accountant that he had become deemed domiciled in the UK. The claimant sought advice from Attendus about this information, but he could not recall them giving any explanation and he did not appreciate the problem at the time. The judge was satisfied that, at most, the claimant had been careless about the information in the email but that would not have been a bar to relief; the email did not affect the fact that there was an operative mistake for the purposes of the Pitt v Holt jurisdiction. There was no bar to rescission because the assets transferred and those acquired with the cash traceable could be recovered.
The court declared that the Milky Way and the Mercurius transfers were executed by the claimant as a result of mistakes and ordered that they be set aside and the assets and/or their traceable proceeds should be transferred to the claimant.
JUDGMENT JUDGE HODGE QC: [1] This is my extemporary judgment on the hearing of a claim brought by way of Part 8 claim form dated 4 December 2018 by Mr Bernardo Guttenberg Willem Hartogs. By that claim form, he seeks to set aside two voluntary transactions which he made in 2009 and late 2013 and …Continue reading "Hartogs v Sequent [2020] WTLR 505"