The battle of Hastings-Bass

It just became more complicated to set aside transactions on the basis of poor tax advice, say Paul Tracey and Richard Wakeham

On 9 March the Court of Appeal (CoA) delivered judgment in the twinned appeals of Pitt v Holt and Futter v Futter. The court rejected what has become known as ’the rule in Re Hastings-Bass’ and clarified the equitable jurisdiction in England to deal with issues arising from erroneous tax advice, including the setting aside of voluntary dispositions on the basis of mistake.

Both the rule in Re Hastings-Bass and the doctrine of mistake are important in the offshore world, primarily in the context of setting aside transactions that have ­resulted in unintended tax consequences. The legal principles detailed in the ­conjoined appeals will make it harder to set aside transactions on the basis of erroneous tax advice unless offshore jurisdictions do not follow the recent decision.

The rule can be defined as the court’s (purported) power to set aside a trustee’s exercise of discretion or power when its effect is otherwise than intended and where the trustee would not have acted as they did having either ignored relevant considerations or considered irrelevant matters.

In the past two decades it has ordinarily been the failure to consider actual and adverse fiscal implications that has ­prompted trustees to ask courts to exercise equitable jurisdiction to set aside erroneous decisions. Clearly, the ability to revisit these decisions has been helpful to trustees and tax advisers as it has enabled them to avoid liability for their errors.

The recent decision appears to put an end to this practice (unless one or both of the recent cases are overturned by the Supreme Court) by finding that the decision in Re Hastings-Bass has been misunderstood and misapplied since at least 1990.

The CoA held that Mr Justice Warner’s interpretation of the rule in Mettoy ­Pension Trustees Ltd v Evans & Ors (1989), as applied subsequently in numerous other cases, was incorrect and marked the ­commencement of the corruption of ­equitable principles, resulting in the ­creation of what (incorrectly) became known as the rule in Re Hastings-Bass.

Points of principles

The recent decision makes it clear that two principles apply in the circumstances where the rule in Re Hastings-Bass hitherto applied. First, a purported exercise of power will be void and ineffective where there is a fraud on the power or the exercise is beyond power, or ultra vires.

Second, an exercise of fiduciary power will be voidable where the trustee has ­disregarded relevant considerations or has had regard to irrelevant considerations but ­cannot apply to set aside these improper exercises of power under the rule in Re ­Hastings-Bass.

Beneficiaries may be entitled to apply to set aside the exercise of the power, or indeed for equitable compensation or other ­equitable relief, but only on the basis that the exercise of power constituted a breach of fiduciary duty by the trustee. If the power is exercised for fiscal advantage the trustee will generally not be liable for breach of trust if advice has been taken from an appropriately qualified and competent adviser. In that case the remedy will likely lie against the adviser for providing ­erroneous advice.

The CoA restated the rule for setting aside voluntary transactions on the basis of ­mistake. To invoke the jurisdiction it was held that the donor must be mistaken as to the legal effect – as compared with the ­consequence – of the disposition or an existing fact that is fundamental to the transaction; and the mistake must be so serious in its character as to render it unjust for the ­recipient to retain the benefit of the gift.

It was also specifically held that the ­creation of unforeseen tax liabilities is a ­consequence, not an effect, that will be ­insufficient to enliven the jurisdiction.

As far England is concerned, it seems that, where mistakes regarding fiscal ­consequences are made, those adversely affected are to look to their trustees and advisers to make good any losses suffered.

It remains to be seen whether offshore jurisdictions will follow suit. There is great scope for both rules to apply differently in offshore jurisdictions, particularly in Jersey. It also remains to be seen what treatment the CoA judgment receives when it is scrutinised in light of alternative arguments and policy considerations in other jurisdictions.

Notably, HM Revenue & Customs has not yet intervened in a rule in Re ­Hastings-Bass application in Jersey, although it has done so in Guernsey.

There remains much scope for – and benefit to be derived from – an alternative principled path being taken in other ­jurisdictions.

Paul Tracey is a partner and Richard Wakeham an associate at Sinels­ ­Advocates