A taxing issue: Jersey trusts and mistake

Two recent decisions have confirmed the willingness of the Jersey Royal Court to set aside trusts (or dispositions into trusts) established on the mistaken understanding that the arrangements would reduce tax liabilities of either the settlor or the beneficiaries. However, if the underlying intention of the settlor in entering into the trust or disposition is aggressive tax avoidance in his home jurisdiction, this will undoubtedly be a factor which the Court will take into account in exercising its discretion.

In both cases, the respective settlors had been led to believe that the arrangements would lead to reduced inheritance tax liabilities in the UK. In both cases, this turned out to be incorrect and indeed significant additional charges arose immediately upon the assets being settled into the trusts.

In the first case (Re. the V Trust [2015] JRC 259****), HMRC did not make any representations and the Court had little hesitation in finding that a mistake had been made, the trust would not have been settled “but for” the mistake, and the mistake was of so serious a character as to render it unjust on the part of the trustee to retain the property.

In the more recent decision in ([Re the Great Escape Trust and Re the Wentworth Trust [2015] JRC 259), HMRC made representations opposing the application, and the Court carried out a more finely balanced assessment of its jurisdiction to set aside the relevant trusts. HMRC’s representations relied heavily on the Supreme Court’s decision in Pitt v Holt and Futter v Futter [2013] UK SC 26, and focussed on the somewhat technical distinction between mistake and “mere ignorance”. The Royal Court respectfully (but firmly) distinguished this English authority, which is not in any event binding in Jersey, stressing instead the “but for” test enshrined in Jersey statute and finding that the mistake was “fundamental to the transactions”.

What caused the Royal Court most difficulty in this case was the application of the discretionary part of the test. When considering the factors relevant to whether the mistake was of so serious a character to render it unjust to allow the trustee to retain the assets, or to render it just for the Court to declare the transactions void and of no effect, the Court was at pains not to condone a scheme which it saw as a “naked attempt” on the part of the parties to avoid their tax obligations in the UK. On the particular facts of the case, the tax implications of setting the trust aside were effectively neutral, and there had been underlying litigation involving the parties which was likely to be revived if the trusts were not set aside, causing a great deal of additional stress to the parties and possible harm to the beneficiaries. These factors led the Court to grant the relief, but it explicitly decided to do so “by a narrow margin”.

The message is that while mistakes regarding the tax implications of settling a trust may be grounds to set that trust aside, the Jersey Courts will not always have sympathy for those who are motivated solely by the desire to avoid tax.