Analysis
The claimant trustees sought to set aside two deeds of appointment dated 31 May 2013 and 22 July 2014 on the grounds of operative mistake, excess of powers or lack of proper consideration.
The trust was settled in 1992 when taking out a policy of life insurance, and provided that subject to and in default of any exercise of the trustees’ powers of appointment, the trust fund and its income was held absolutely for the ‘Immediate Beneficiaries’ as defined in the deed. The settlor died in 2004 but the trustees did not become aware of the policy until late 2012. The trustees discussed their proposed course with their solicitors and an attendance note recorded that two of the Immediate Beneficiaries ‘should retain the interests in possession created by the original trust’. When the first deed of appointment was drafted, the solicitors’ advice was that its effect was to leave the trusts for those beneficiaries ‘as they are’. By each of the deeds of appointment the trustees revocably appointed a distinct share of the fund to be held on trust to pay the income to each of the two beneficiaries during their lives.
In 2017 the trustees obtained advice from tax counsel, who advised that the effect of the deeds of appointment was to revoke the previously qualifying interests in possession and to create new, non-qualifying interests in possession, bringing assets into the ‘relevant property’ regime for inheritance tax. Because the appointments were revocable, the immediate beneficiaries retained the possibility of benefit, and so the gifts would be treated as gifts with reservation of benefit. This gave rise to an immediate charge to tax of £365,000 plus interest and additional decennial charges.
HMRC was notified of the proceedings but declined to be joined. Counsel for the respondent, who represented the ‘Discretionary Beneficiaries’ (the settlor’s children, grandchildren and great-grandchildren), argued that because:
- (i) the deeds accurately reflected the trustees’ intentions;
- (ii) the 2013 appointment made no ‘economic difference’ to the rights of the Immediate Beneficiaries, because the trustees’ overriding powers of appointment enabled them to achieve the same outcome; and
- (iii) adopting a purposive interpretation of the Inheritance Tax Act 1984, there was no charge to inheritance tax because there was no ‘material change’ in the immediate beneficiaries’ rights following the appointments,
the deeds should not be rescinded. Alternatively, the respondent argued that rescission should only be granted on terms that the trustees make similar appointments.
The issues to be determined were:
- (1) Should the deeds of appointment be set aside for operative mistake?
- (2) If so, should the court impose any conditions upon rescission?
Held:
- (1) The deeds of appointment would be set aside. The principles applicable to such applications were summarised in Kennedy v Kennedy [2014]. The trustees did not intend to alter the interests of the affected beneficiaries, and tax considerations were material to that intention.
- (2) The fact that the trustees could (if they chose to do so) exercise their powers to place the beneficiaries in the same position as they were intended to be did not prevent a change in the substance of their entitlement. A right to capital which is absolute unless revoked by an exercise of the trustees’ powers is radically different from a life interest in that capital with the possibility of an absolute interest being appointed.
- (3) The effect of the appointments was to give rise to immediate charges to inheritance tax. The statements in RFC 2012 plc v Advocate General for Scotland [2017] did not support the proposition that where an interest in possession is replaced by one with the same economic effect, s52 Inheritance Tax Act 1984 is not engaged. The appointments created new shares of the fund in which each beneficiary had a defined interest, giving rise to charges to inheritance tax: RBC Trustees (CI) Ltd v Stubbs [2017] followed. The trustees had therefore made an operative mistake: Futter v HMRC [2013].
- (4) The appointments would be rescinded without conditions. Although the court had power to impose terms upon the grant of rescission, neither the court nor the trustees were fully appraised of the considerations applicable to a future exercise of the trustees’ powers, and there was no proper evidential basis for imposing such terms. The question of such terms was first raised in the respondent’s skeleton argument before the hearing, and the claimants had not had sufficient opportunity to consider or respond to it, nor had other respondents been given notice of the point.
Permission to issue a claim out of time granted.
JUDGMENT MASTER CLARK: Introduction [1] This is a Part 8 claim seeking to set aside two deeds of appointment, dated 31 May 2013 (the 2013 Appointment) and 22 July 2014 (the 2014 Appointment) made by the trustees of a trust (the Trust) created by a declaration of trust made by Hilary Marsden (formerly known as …Continue reading "Hopes & anr v Burton & ors [2023] WTLR 187"