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Featured case: Trusts
Futter & Anor (Appellants) v The Commissioners for HM Revenue and Customs (Respondent); Pitt & Anor (Appellants) v The Commissioners for HM Revenue and Customs (Respondent)  UKSC 26. Lord Neuberger JSC; Lord Walker JSC; Lady Hale JSC; Lord Mance JSC; Lord Clarke JSC; Lord Sumption JSC. 9 May 2013
The Supreme Court considered the existence and limits of the principle known as ‘the rule in Hastings-Bass (Deceased), Re  Ch 25’.
Appeals allowed in part
In joint appeals, trustees Futter and Pitt appealed against a decision that the rule in Hastings-Bass could not operate in their favour to unwind deals that had attracted tax disadvantages owing to inaccurate professional advice.The court also decided if it had jurisdiction to set aside the dispositions under the doctrine of mistake.
Futter’s appeal concerned wrong advice given by a solicitor trustee on capital gains tax.
Pitt’s appeal concerned financial advisers recommending a trustee settle damages in a discretionary trust, resulting in inheritance tax consequences the advisers had omitted to address.
The court vitiated both transactions under Hastings-Bass. The Court of Appeal found that the rule was incorrect and allowed HMRC’s appeals, holding that when acts within the power of trustees were vitiated by failure to take account of a relevant factor, a breach of fiduciary duty could not be shown when the trustees had acted on apparently competent advice.
The court held it could set aside a transaction under the equitable doctrine of mistake where the mistake concerned the legal effect of the disposition or a fact that was basic to the transaction, but that that doctrine did not apply to unforeseen fiscal consequences of a trustee’s decision.
Appeals allowed in part
The Hastings-Bass rule and the equitable doctrine of mistake were different, but they overlapped in application. Early cases had been decided by plaiting together three strands of Chancery doctrine to produce a new rule and blurring the distinctions between doctrines.
The ratio of Hastings-Bass was open to debate; in the context of its two main precursors, Baron Vestey’s Settlement  and Abrahams Will Trusts , it was not about mistake, it did not concern what had been in the trustees’ minds at the relevant time and it had distinguished rather than overruled Abrahams.
The ratio of Hastings-Bass beginning with the words, “To sum up the preceding observations […]” was open to criticism for the generality of its reference to unintended consequences and could not be regarded as clear guidance about when a court could intervene in a transaction.
The rule developed whereby, in order for it to be invoked, the inadequate deliberation had to amount to a breach of duty. Such a mistake rendered the trustees’ disposition voidable, not void.
There had to be a lot of flexibility in the court’s possible responses to Hastings-Bass and to lay down a rigid rule of what the test should be would inhibit the best practical solution in different situations.
The rule centred on the failure of trustees to perform their decision-making function and that founded the court’s jurisdiction to intervene. It would be contrary to principle and authority to impose a form of strict liability where trustees had acted on apparently competent professional advice that turned out to be wrong.
In Futter’s case, the solicitor had overlooked a statutory amendment that resulted in him giving wrong advice. It would be artificial to distinguish between him and the other trustee; they had acted together. Neither the solicitor nor Pitt were in breach of fiduciary duty.
In both cases the CoA had been right to find that the Hastings-Bass rule was not applicable.
The test for setting aside a voluntary disposition for mistake centred on the gravity of the mistake and its consequences. The injustice of leaving a mistaken disposition uncorrected had also to be objectively evaluated. An intense focus on the individual facts was required. A mistake had to be distinguished from ignorance or inadvertence.
Pitt’s case satisfied the test for setting aside a voluntary disposition on the ground of mistake and the court below had been wrong to find otherwise.
For the appellant Pitt
- Wilberforce Chambers’ Christopher Nugee QC
- Serle Court’s Will Henderson
- Bolitho Way partner David Grinstead
For the appellant Futter
- Wilberforce Chambers’ Robert Ham QC
- 3 Stone Buildings’ Richard Wilson and Jennifer Seaman
- Withers partner Paul Hewitt
- For the respondent HMRC
- Serle Court’s Philip Jones QC and Ruth Jordan
Commentary: Ruth Jordan
The restricted rule in Hastings Bass still protects beneficiaries who rely on trustees acting within and in accordance with their powers, but beyond this no longer puts trusts in a special category where transactions with unintended consequences are concerned.
The decision is unlikely to please advisers or their insurers because it blocks the route that has enabled liability insurers to avoid full liability where, for example, tax planning schemes have failed.
Those saddled with a bad decision where the trustee has acted properly now have as their only direct remedy rescission on grounds of mistake.
The Supreme Court’s new test for mistake in voluntary transactions is flexible. Lord Walker whilst giving courts discretion to decide cases on their own facts, identifies artificial tax avoidance schemes as unlikely to merit intervention under this jurisdiction on the basis (i) that knowingly taking a risk the tax planning scheme would prove ineffective may not qualify as a ‘mistake’; and (ii) that relief is discretionary and may therefore be refused on grounds of public policy.
This will be not be welcomed by those devising, using and advising on tax avoidance schemes. It is likely to give rise to interesting litigation exploring the boundary between tax planning decisions that merit the court’s intervention and those that do not.
Ruth Jordan is a barrister at Serle Court specialising in trusts and tax litigation