Van der Merwe v Goldman & anr [2016] EWHC 790 (Ch)

Analysis

The claimant and first defendant were husband and wife and joint freehold owners of a property in the UK where they lived. Up until March 2006 the claimant and first defendant were treated as domiciled in South Africa. However, from 6 April 2006 they would be treated as domiciled in the UK for inheritance tax purposes. In November 2005 the claimant took advice on mitigating the consequences of being treated as domiciled in the UK for the purposes of inheritance tax. He was advised that his position would be improved if he placed the property into an interest in possession settlement.

On 24 March 2006, the claimant and first defendant executed a transfer of the title to the house to the claimant alone for no stated consideration. On 27 March 2006 the claimant executed a deed of settlement settling the property on the terms of that deed and appointing himself and the first defendant as trustees of the settlement. On 27 March 2006 the claimant also executed a transfer of the title to the house to himself and the first defendant as trustees of the settlement. The beneficiaries of the settlement were the claimant and first defendant as life tenants and, subject to their life interests, their children and remoter issue.

As the law stood prior to 22 March 2006, the claimant would not have been liable to pay inheritance tax on such a settlement and creating such a settlement would give him certain advantages. This was the claimant and first defendant’s shared reason for engaging in the transactions. However, due to changes in the law, which took effect from 22 March 2006, an unintended consequence of the transactions was that the claimant became liable to pay inheritance tax at the rate of 20% of the value of the property on 27 March 2006 and a further charge at the rate of 6% of the value of the property on every 10th anniversary of that date. These consequences were due to changes in the law which took effect from 22 March 2006 and of which the claimant and first defendant were unaware in March 2006. In March 2006 the claimant and first defendant believed the steps taken would not result in an immediate charge to inheritance tax nor a 10 year anniversary charge. The claimant only became aware of the tax consequences of the transactions in 2012.

The claimant sought an order setting aside the settlement and the transfer of 27 March 2006 on the basis that he was mistaken as to the tax consequences of creating that settlement. In the alternative, the claimant and first defendant sought an order setting aside the transfer of 24 March 2006 and the settlement and transfer of 27 March 2006. HMRC opposed the claim.

There was a dispute as to which set of rules dealing with setting aside, or declaring to be void, transactions on the ground of mistake applied; those dealing with contracts or those dealing with gifts. In respect of rescission of a contract, there was no equitable jurisdiction which allowed a court to order rescission of a contract for common mistake in circumstances that fall short of the circumstances in which the common law would hold the contract to be void. In respect of rescission of a gift, there was a separate equitable jurisdiction. It was common ground that if the contract rules applied, the claimant could not satisfy them.

HMRC argued that the transactions were part of a contract between the claimant and first defendant involving the transfer of the property to the claimant on 24 March 2006 and the subsequent settlement and transfer of 27 March 2006. The first defendant had given consideration for her benefits under the settlement in transferring the property on 24 March 2006. Accordingly only the common law applied. The claimant and first defendant argued that the settlement and transfer of 27 March 2006 were voluntary dispositions for which the first defendant gave no consideration. The transfer on 24 March 2006 was a gift following which the claimant was free to do as he pleased with the property. Accordingly the equitable rules concerning gifts applied.

Held, setting aside the transfer of 24 March 2006 and the settlement and transfer of 27 March 2006:

1. 1. 1. 1) The difference between the cases where the equitable rules apply and those where they do not turns on whether consideration has been given for the benefit conferred by the transaction. If the effect of rescission would deprive a party of a benefit for which he gave consideration then the common law rules apply. If the effect of rescission would deprive a party of a benefit for which he gave no consideration then there was a separate equitable jurisdiction to order rescission.
      2. 2) Both the claimant and first defendant and HMRC’s analyses were rejected. The facts did not give rise to an informal contract nor was the transfer of 24 March 2006 an outright gift. Following the 24 March 2006 transfer, the claimant held the property on resulting trust under which he was able to create the settlement but if he did not do so, the property was held on the same trust as existed prior to the 24 March 2006 transfer.
      3. 3) By taking the steps on 24 and 27 March 2006 the claimant and first defendant implemented their intention to settle the property on themselves and their children and remoter issue. The position was no different to a sole legal and beneficial owner settling his property on himself and family members. There was no consideration for the settlement. It was a unilateral transaction and all the beneficiaries were volunteers. Even if the steps on 27 March 2006 were considered in isolation, the same conclusion would be reached. Prior to 27 March 2006 the claimant held the property on resulting trust under which he was permitted to create the settlement and failing which held the property on trust for himself and the first defendant. On 27 March 2006 the claimant gave effect to the common intention of the claimant and first defendant. The position was still that the beneficial owners settled the property on themselves and their children. Accordingly the equitable rules applied to the claim to set aside the transactions of 24 March 2006 and 27 March 2006 or alternatively the transactions solely on 27 March 2006.
      4. 4) Applying the equitable rules, the claimant and first defendant were entitled to an order setting aside the transactions of 24 and 27 March 2006 on grounds of mistake:
      5. 4.1) The claimant and first defendant made a relevant mistake when entering into the transactions on 24 March 2006 and 27 March 2006; they were ignorant of the tax changes which led them to a false belief or assumption that the creation of the settlement did not involve a chargeable transfer so that no inheritance tax would be payable as a result.
      6. 4.2) The claimant and first defendant would not have entered into the transactions if they had not made this mistake.
      7. 4.3) The mistake did not involve them running a risk about a possible liability to pay inheritance tax by reason of creation of the settlement as they believed that there would be no question of a charge to tax by reason of the creation of the settlement.
      8. 4.4) The fact the mistake was a mistake about tax was irrelevant.
      9. 4.5) In view of the amount of tax and interest payable in this case, their mistake was sufficiently grave to satisfy the relevant test.
      10. 4.6) Their mistake was of so serious a character as to render it unjust on the part of a volunteer to resist rescission of the transactions.
      11. 5) The court was not acting in vain by making an order for rescission in circumstances where the claimant and first defendant could vest the property in themselves beneficially under the terms of the settlement as the claimant and first defendant doing so would not avoid the liability to pay inheritance tax.

   6) The claimant and first defendant had not accepted the risk that their transactions might be caught by taxing provisions of which they were not aware. That risk had come about because they were unaware of the budget announcement of 22 March 2006 and had not asked anyone to check on 24 or 27 March 2006 whether anything had changed since the earlier advice had been given in November 2005. This was not a case where the parties did not make a mistake but instead accepted a risk that a scheme might not have its intended results. The claimant and the first defendant made a mistake for the purposes of the principles in

Pitt v Holt

[2013] WTLR 977 because, being ignorant of the budget announcement, they wrongly believed that their transactions would not give rise to a charge to tax.

MORGAN J: The claim in outline [1] The first defendant is the wife of the claimant. Prior to 24 March 2006, the claimant and the first defendant were the joint freehold owners of a substantial house in Oxford, where they lived. On Friday 24 March 2006, the claimant and the first defendant executed a transfer …

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