An update on the rule in Hastings-Bass
John Dickinson
St John’s Chambers, Bristol
Summary: An update on the rule in Hastings-Bass as to when a trustee can unwind the
exercise of their power, including the cases of: Thorpe v HMRC; Pitt v Holt and HMRC;
Futter v Futter and HMRC; Jiggens v Low.
1.
Issue: Where a trustee or other fiduciary has exercised a power but the
transaction does not have the full effect intended can the Court set aside the
exercise of their discretionary power?
2.
The rule in Hastings-Bass: "Where a trustee acts under a discretion given to him
by the terms of the trust, but the effect of the exercise is different from that
which he intended, the court will interfere with his action if it is clear that he
would not have acted as he did had he not failed to take into account
considerations which he ought to have taken into account, or taken into account
considerations which he ought not to have taken into account."1
Re Hastings-Bass decd, Hastings-Bass and others v. Inland Revenue
Commissioners 2
3.
The original formulation of the rule was in a negative form: “where by the terms
of a trust ... a trustee is given a discretion as to some matter under which he acts
in good faith, the court should not interfere with his action notwithstanding that
1
Lloyd LJ in Sieff v Fox [2005] 1 WLR 3811 para. 49, restating the positive form of the rule formulated by
Warner J in Mettoy Pension Trustees v Evans [1990] 1 WLR 1587, 1621H. Lloyd LJ’s formulation was approved by Sir
Andrew Park in Smithson v Hamilton [2008] 1 All ER 1216 at para 52, describing it as a comprehensive synthesis of the
law.
2
[1975] 1 Ch 25. Buckley LJ delivering the judgment of the Court of Appeal.
Page 1 of 17
it does not have the full effect which he intended, unless ...it is clear that he
would not have acted as he did (a) had he not taken into account considerations
which he should not have taken into account, or (b) had he not failed to take
into account considerations which he ought to have taken into account” 3
4.
Background facts:
(1)
A 1947 settlement settled property on trusts for a protected life interest
for A and after A’s death on trust for such of his sons or remoter male
issue as A should appoint. In 1948 A’s first son W was born.
(2)
A’s sister made a settlement in 1957 of a sum of £500 on trusts which
gave a life interest to W and created certain powers and other interests,
including the power for the trustees to give W the capital on attaining
the age of 21.
(3)
In 1958 by a revocable deed of appointment under the 1947 settlement
A appointed W to take the 1947 settlement on A’s death and on W
attaining 25 years of age.
(4)
To seek to avoid the high rate of estate duty that would be payable on
A’s death the 1947 trustees devised a scheme to advance monies from
the 1947 settlement to the 1957 settlement, using powers under section
32 of the Trustee Act 1925. The advancement was a sum of £50,000
made by a sub-settlement to be held on the trusts of the 1957
settlement.
(5)
In error the Trustees had misunderstood the rule as to perpetuities.
Because W had not been alive at the time of the 1947 settlement the
£50,000 advancement could only take effect as a life interest for W. The
other powers and trusts of the 1957 settlement, in relation to the
£50,000 sum, were void for perpetuity. A died in 1964.
3
Hastings-Bass case page 41G.
Page 2 of 17
(6)
The Trustees of the 1947 settlement brought a summons for a
declaration as to whether estate duty was payable on the £50,000 sum.
The Inland Revenue Commissioners were the respondents to the
summons.
(7)
The key issue was whether or not W had a life interest in the £50,000
advance. The parties agreed that estate duty was not payable if there
was such a life interest.
5.
The Hearing at first instance: The IRC’s submissions included that the advance
was ineffective to create a life interest for W because the trustees in making the
advance had to have a proper understanding of the effect of the sub-settlement
otherwise they could not take into account all the relevant circumstances, or give
due consideration and weight to the benefit to be conferred on the person
advanced. Plowman J held that the result produced by the advance was
substantially and essentially different from the intentions of the Trustees.
Following Re Abrahams WT [1969] 1 Ch 463 Plowman J held that the Trustees
never effectively exercised their powers of advancement and that estate duty was
payable on the £50,000 advance purported to have been made from the 1947
settlement.
6.
The Court of Appeal:
(1)
The Grounds of Appeal included that as the advance was made in good
faith and within the statutory powers of the 1947 settlement it was a
valid advance so as to create a life interest for W and was not invalidated
merely because the other beneficial interests and powers which the
trustees believed they were creating in relation to the advanced funds
was void for perpepetuity, contrary to the trustees incorrect
understanding of the law 4.
4
This was not the fault of the Trustees’ solicitors. The law changed. At the time of the advancement the law on
perpetuities was as set out by Dankwerts J in Re Pilkington's Wills Trusts [1959] Ch 699. However in 1964 this decision
Page 3 of 17
(2)
The IRC submitted that making an advancement was the exercise of a
fiduciary power which required the trustees to weigh the benefits of the
advance against the other interests affected. To do that the trustees had
to have a proper understanding of the effect of the sub-settlement 5.
(3)
The Decision: The advance was effective to create a life interest in
possession for W. The reasons included: (1) where, by the terms of a
trust (including the powers under section 32 of the Trustees Act 1925
Act, a trustee was given a discretion as to some matter under which he
acted in good faith, the court should not interfere with his action,
notwithstanding that it did not have the full effect which he intended,
unless (1) what he had achieved is unauthorised by the power conferred
upon him or (2) it is clear that he would not have acted as he did (a) had
he not taken into account considerations which he should not have
taken into account, or (b) had he not failed to take into account
6
considerations which he ought to have taken into account .
(4)
The reasoning: If the advance was valid then W had a life interest in the
£50,000 advance sum. If the advance was not valid the £50,000 sum
remained in the 1947 settlement and by reason of estate duty was
reduced to £13,500 (27% of the advance). The saving of tax was the
primary consideration in the minds of the trustees 7, combined with an
acceleration of W’s interest. The powers and trusts under the 1957
settlement, that were void for the £50,000 due to perpetuity, were of
far less significance to the trustees 8. The IRC had failed to establish that,
had the trustees realised that the trusts (other than the life interest)
would fail for perpetuity then they would not have acted as they did.
The trustees could not reasonably have thought that a failure of the
was overturned by the House of Lords in Pilkington Wills Trusts [1964] AC 612: powers of advancement were special
powers that had to be written into the trust expressly for the purposes of applying the perpetuity rule.
5
Page 29D and F.
6
This is the summary at Page 41G.
7
Captain Hastings-Bass wrote a letter, contemporary to the advancement, referring to the scheme as
something by which ‘some of the enormous death duties may be reduced’.
8
Page 39E – these ‘ulterior’ trusts were described as ‘mere make-weights which might be treated as enhancing
the benefit of the scheme as a whole’.
Page 4 of 17
other powers and benefits would mean that the scheme could not be
regarded as being for the benefit of W 9.
7.
The Court had to grapple with the important public policy issues 10:
(1)
As a matter of public policy should the Court have the jurisdiction to
interfere with a trustees’ decision which has been made in the bona fide
exercise of their powers and falling within the letter of their powers.
(2)
As a matter of public policy should such a jurisdiction exist to allow an
attack on a Trustees’ decision to be made years later on grounds that
the Trustees has some misapprehension of the law or facts. Such a
jurisdiction leads to uncertainties in the administration of trusts,
difficulties for the Court in drawing the line and requires a retrospective
investigation into the states of mind of the trustees in exercising the
discretion.
The formulation of the Rule in Hastings-Bass seeks to avoid these policy issue problems
by applying an objective assessment as to whether it is clear that the Trustees would not
have acted as they did.
Mettoy Pension case
8.
There was an important review of the Rule in Hastings-Bass in the case of Mettoy
Pension Trustees Ltd v. Evans 11
9
Page 40C. “Had it occurred to the trustees that the ulterior trusts might all fail for perpetuity, they could not
reasonably have thought that this could tip the scales in the weighing operation against the scheme. The law cannot,
in our judgment, require the trustees' exercise of their discretion to be treated as a nullity on the basis of an absurd
assumption that, had they realised its true legal effect, they would have reached an unreasonable conclusion as the
result of the weighing operation” and page 41B “If the resultant effect of the intended advancement were such that it
could not reasonably be regarded as being beneficial to the person intended to be advanced, the advancement could
not stand, for it would not be within the powers of the trustees under section 32. In any other case, however, the
advancement should, in our judgment, be permitted to take effect in the manner and to the extent that it is capable of
doing so”.
10
Raised in Hastings-Bass, p.28F during submissions by the Trustees’ counsel as part of his attack on the case of
In Re Abrahams’ Will Trusts [1969] 1 Ch 463.
11
[1990] 1 WLR 1587. Warner J.
Page 5 of 17
(1)
A company had a pension fund with a set of 1969 pension rules
providing that on the insolvency of the company annuities were to be
purchased for beneficiaries entitled to a pension and any surplus was to
be paid to the company in cash. By a deed executed in 1983 the rules
were changed so that by a new rule 13 on an insolvency of the company
any surplus in the pension, after securing liabilities, was to be applied ‘at
the absolute discretion of the company’ to secure further benefits for
pensioners and then any left over balance was to be paid to the
company.
(2)
Warner J held that the ‘absolute discretion’ to augment benefits was a
fiduciary power that could not be released, it was not an asset of the
company and could not be exercised by a receiver or liquidator.
(3)
The liquidator contended that if it was a fiduciary power then either the
12
entire 1983 deed should be set aside, or rule 13 should be set aside .
(4)
Warner J applied the rule in Hastings-Bass and held that the Court
would have set aside the 1983 Deed if it was clear that the trustees
would not have exercised their discretion to execute the deed as they
had done if they had fully taken into account the changes made by the
new rules in the 1983 Deed relating to the winding up of the scheme at
a time when the company's insolvency was imminent.
(5)
Warner J set out a theefold test for the Court: “... where it is claimed
that the rule in Hastings-Bass applies, three questions arise: (1) what
were the trustees under a duty to consider? (2) did they fail to consider
it? (3) if so, what would they have done if they had considered it?”
(6)
Warner J held that on the facts it had not been shown that the Trustees
had no proper understanding of the new rules or that, if advised that it
was a fiduciary power, the effect of which was to transfer to the
12
Page 1621D.
Page 6 of 17
company an unfettered discretion over the pension surplus, then they
might well have decided to execute the deeds 13.
(7)
9.
Hence the 1983 deed remained valid and was not set aside.
The significant development or clarification in the Mettoy Pensions case are:
(1)
Warner J restated the rule in a positive formulation: “where a trustee
acts under a discretion given to him by the terms of the trust, the court
will interfere with his action if it is clear that he would not have acted as
he did had he not failed to take into account considerations which he
ought to have taken into account”
(2)
14
Warner J recognised a separate principle that could be labelled as ‘the
Rule in Hastings-Bass’.
(3)
In the Mettoy case no part of the Deed was rendered ineffective by any
rule of law (unlike Hastings-Bass where the rule against perpetuities
rendered part of the advancement by sub-settlement ineffective).
Warner J held that the Rule in Hastings-Bass was not limited to cases
where an exercise by trustees of a discretion vested in them is partially
ineffective because of some rule of law or because of some limit on their
discretion which they overlooked. The reason for the application of the
principle is the failure by the trustees to take into account considerations
that they ought to have taken into account. It does not matter whether
that failure is due to the trustees having overlooked (or to their legal
advisers having overlooked) some relevant rule of law or limit on their
discretion, or is due to some other cause.
(4)
15
If the mistake is one of law then the Court must consider what would
have happened had the Trustees been correctly advised as to the effect
13
14
15
Page 1629H.
Page 1621H.
Page 1624B.
Page 7 of 17
in law at the time of the hearing of what they were doing 16. The
assumed correct legal advice is not based on the state of the law and
authorities at the time of the exercise of the power.
(5)
The Test: It is not enough to show that the trustees did not it have a
proper understanding of the effect of their act. It must also be clear that,
had they had a proper understanding of it, they would not have acted as
17
they did .
(6)
Burden of Proof / Standard of Proof: Those who challenge an exercise by
trustees of a discretion in reliance on the rule in Hastings-Bass have the
burden of proof. The standard of proof is not the same standard as in an
18
action for rectification .
(7)
Evidence: It is necessary to have evidence from the trustee as to what
they would have done if they had been correctly advised 19.
(8)
Remedy: Warner J clarified that if the Court is satisfied that the trustees
would have acted in the same way but with the omission of a particular
provision in a deed then the court can declare only that provision void.
The remedy to be adopted must depend on the circumstances of each
20
case .
Other Developments
10.
The case of Stannard v Fisons Pension Trust Ltd 21 confirms Warner J’s proposition
that the Rule in Hastings-Bass applies to mistakes of fact, and is not limited to
mistakes as to the law. Pension Trustees had exercised a discretion to transfer
16
Page 1626F.
Page 1624D.
18
Page 1624E.
19
Page 1629H. The trustee was not cross examined as to what he would have done if he had been advised that
the power to be given to the Company under the rule changes was a fiduciary power.
20
Page 1624H to 1625A.
21
[1992] 1 IRLR 27, CA. [1991] PLR 225.
17
Page 8 of 17
assets from one pension fund to another based on an outdated valuation 22. The
Court of Appeal upheld the application of the Rule in Hastings-Bass to invalidate
the exercise of discretion.
11.
In Sieff v Fox 23 Lloyd LJ considered how the formulation of the Rule in HastingsBass might vary between cases concerning a true discretionary power and those
where the trustees were under a duty to act.
12.
In the Sieff case there was an exercise of a discretionary power of appointment
by trustees of a discretionary trust. Tax advice was received and an appointment
was made to seek to save capital gains tax on chattels in a stately home. The
Trustees discovered that the advice they had been given regarding capital gains
tax was incorrect and that the individual receiving the chattels under the
appointment was liable for a substantial sum of capital gains tax in respect of the
chattels. The Court declared that the appointment was invalid applying the Rule
in Hastings-Bass and holding that tax consequences might be relevant
considerations 24 and that there was a material difference between the intended
and the actual tax consequences of the appointment.
13.
Lloyd LJ held that where there was a true discretionary power, that is where the
trustees were not under a duty to act, then the relevant test was whether the
trustees "would" have acted as they did if they had not misunderstood the
effect that their exercise of the discretionary power would have.
14.
Lloyd LJ explained that there was a real distinction between exercising
discretionary powers and cases where the trustees were under a duty to act 25.
Only in a case where the trustees were under an obligation to act could it suffice
to vitiate their decision to show that they "might" have acted differently. If an
act by trustees were set aside where the trustees had acted under an obligation,
22
The valuation was used to consider whether the sum to be transferred should be calculated on the total
service reserve method or the past service reserve method.
23
[2005] 1 WLR 3811. Lloyd LJ was sitting as a High Court judge. His elevation to the Court of Appeal took
place before he handed down his judgment.
24
Paragraph 86.
25
The Stannard case was given as an example of a case where the trustees were under a duty to act, by
appropriating an amount to be applied for the benefit of the transferring employees, though they had to decide, after
consulting the actuary, what just and equitable amount should be appropriated.
Page 9 of 17
then the beneficiaries could require the trustees to start again on the correct
basis and so the lower test of "might" was appropriate. If the trustees' act were
voluntary they could not be compelled to act again if the act were set aside, so
the more demanding test of "would" was justified 26.
15.
Lloyd LJ held that there was no need to identify a breach of duty by trustees or
27
their advisors , only a failure to take a relevant consideration in to account.
16.
Lloyd LJ considered that the main ways open to the court to control the
application of the principle are: (a) to insist on a stringent application of the tests
as they have been laid down, (b) to take a reasonable and not an overly
demanding view of what it is that the trustees ought to have taken into account,
and (c) to adopt a critical approach to contentions that the trustees would have
acted differently if they had realised the true position 28.
Thorpe v Commissions for HM Revenue & Customs 29
17.
This case establishes that the Rule in Hastings-Bass is not applicable to an act
that is a breach of trust.
18.
Mr Thorpe withdrew the whole of the pension fund as the only beneficiary of
the Scheme. The Revenue withdrew approval for the scheme and assessed Mr
Thorpe as liable to tax on the income from the fund. Mr Thorpe appealed to the
Special Commissioner, who held that the Scheme could not be reconstituted
under the Rule in Hastings-Bass.
19.
The Court held that Mr Thorpe had not been entitled to withdraw funds from
the Scheme 30.
26
27
Ch 409.
Paragraphs 56, 77.
Paragraph 119. LLoyd LJ declined to follow and differed from Lightman J in Re Barr’s Settlement Trusts [2003]
28
Paragraph 82. The question whether the difference in effect has to be substantial in order for the principle to
apply comes into this part of the test, see paragraph 77.
29
[2009] EWHC 611 (Ch) Sir Edward Evans-Lombe (26.3.09)
30
Mr Thorpe had sought to rely on the rule in Saunders v. Vautier to justify the removal of all the funds
Page 10 of 17
20.
The Court 31 agreed with the Special Commissioner that Mr Thorpe could not rely
on the Rule in Hastings Bass.
(1)
The Special Commissioner had found that Mr Thorpe was acting as a
beneficiary and the Rule in Hastings-Bass did not provide relief for the
consequences of an act of a beneficiary. The Court did not disagree with
this statement of principle that the Rule does not apply to decisions by
beneficiaries.
(2)
However the Court found that Mr Thorpe was acting as a trustee and
held that the Rule was not applicable, as Mr Thorpe in seeking to
withdraw the pension monies was not acting under a discretion given to
the trustees by the pension scheme, but rather was purporting to
sanction an unauthorised payment and thereby he was committing a
32
breach of trust .
Pitt and Shore v. Holt and HMRC 33
21.
The Court held that the Rule in Hastings-Bass was not limited to acts by trustees
exercising a power for the benefit of a beneficiary under a trust instrument. The
Court held that the Rule in Hastings-Bass was capable of applying to the exercise
by a fiduciary of a power for another. It would not necessarily apply to every
fiduciary relationship. Where a fiduciary was required to follow the instructions
of the principal the Rule in Hastings-Bass would not apply 34.
22.
P suffered serious brain damage in a road accident. P’s wife C1 was appointed
his receiver by the Court of Protection. P obtained damages by a compromise
approved by the court. C1 took advice from financial advisors and a discretionary
settlement was proposed under which the beneficiaries would be P, C1 and their
children. The Court of Protection authorised C1 as receiver for P to execute a
31
Paragraphs 18 and 19.
On this basis Mr Thorpe escaped a charge to tax, as the funds were treated as never having left the Scheme,
see paragraph 42.
33
[2010] 1 WLR 1199. Robert Englehart QC sitting as Deputy Judge of the High Court, Ch.D.
34
Paragraph 38.
32
Page 11 of 17
settlement. No consideration was given to the inheritance tax implications 35. The
form of settlement adopted was such that a liability to inheritance tax arose 36.
After P’s death C1 sought declarations that C1 was entitled to avoid the
settlement under the Rule in Hastings-Bass.
23.
The Revenue contended:
(1)
that the principle of the Rule in Hastings-Bass had only ever been applied
in the context of dispositions by trustees and although C1 when acting
as his receiver had been a fiduciary for P the establishment of the
settlement should be regarded as equivalent to an act done by P himself
and therefore outside the scope of the rule; and
(2)
that the operation of the Rule in Hastings-Bass should be confined to
cases where the immediate purpose of the act in question had not been
achieved; fiscal consequences would always be irrelevant.
24.
On the first issue the Court held that the rule in Hastings-Bass was capable of
applying to a disposition made by a receiver of the patient's funds to the trustees
of a settlement. In principle there was no material distinction between a trustee
exercising a power for the benefit of a beneficiary under a trust instrument and a
receiver exercising a power for the benefit of a patient pursuant to the Mental
37
Health Act 1983 . In each case the power was a fiduciary one and in each case
the person exercising the power was doing so in the interests of another but was
not acting on the instructions of the other. Although the effect of execution by a
receiver was vis-à-vis third parties as effective as execution by the patient himself,
assuming he were capable of managing his own affairs, it would be artificial to
say that a decision by a receiver was for all purposes to be treated as a decision
by the patient 38. The critical point in the circumstances of the instant case was
35
Page 779D. Had the settlement included a clause requiring that half the trust fund applied during P’s life be
applied for his benefit then the settlement would have been exempt from Inheritance Tax, s.89 Mental Health Act
1983.
36
On the £1.4m settlement the tax charge would have been at least an initial £100k on the initial settlement in
1994 and then a further £200k to £300k on P’s death in 2007.
37
Paragraph 39.
38
Paragraph 37.
Page 12 of 17
that it had been for C1 to decide whether or not it was in the patient's interest
for her to dispose of his property to trustees under the settlement 39.
25.
On the second issue the Rule in Hastings-Bass was not to be confined to cases
where the immediate purpose of the act in question had not been achieved. The
submission that tax consequences were always irrelevant was directly contrary to
authority, following the Mettoy case and the Sieff case and others. The Court
flagged up that the time was ripe for the Court of Appeal to consider the Rule in
40
Hastings-Bass .
26.
On the facts the Court held that there was no doubt that inheritance tax was a
relevant consideration which ought to have been taken into account before the
41
settlement was entered into . The question of inheritance tax had simply not
been addressed at all. There was no doubt that if C1 had appreciated that the
creation of a discretionary trust was going to give rise to large inheritance tax
liabilities she would not have entered into the settlement as P’s receiver.
42
Accordingly the settlement could be set aside as an ineffective transaction .
27.
The alternative claim to set aside the transaction for equitable mistake failed. It
had to be shown that a particular desired objective was not achieved 43 (the ‘legal
effect’), rather than there being an unforeseen consequence of the transaction 44.
Further as C1 had not considered inheritance tax at all it could not be said that
she was mistaken as to whether that tax would arise.
Futter v Futter and HM Revenue & Customs 45
28.
This case establishes that the consequence of invoking the Rule in Hastings-Bass
is to make the deed or transaction void (as opposed to voidable)46. Norris J
39
The Grand Court of the Cayman Islands, Chief Justice Anthony Smellie QC on 12.4.10 followed this decision
in Re Wang Trust (unreported) [See STEP Journal article August 2010] in holding that in principle the actions of
directors in paying a dividend were amenable to the Rule in Hastings-Bass.
40
Paragraph 41.
41
Paragraph 45.
42
The Court did not have to decide if the transaction was void or voidable, see paragraph 22.
43
Paragraphs 32 and 49 applying the test of Millett J in Gibbon v Mitchell [1990] 1 WLR 1304.
44
The Court differed from the decision in the Isle of Man of Re Betsam Trust [2009] WTLR 1489 and in Jersey of
A Trust [2010] JRC 245.
45
[2010] All ER (D) 52 (Apr.)
Page 13 of 17
explained that if the rule applied then the trustees had not made a decision
within the ambit of their power.
29.
C1 was a trustee and beneficiary of a discretionary trust. C1 and his co-trustees
exercised their discretion under the trust to advance the whole of the trust fund
to C1 and his children. The amounts advanced exceeded their annual capital
gains tax allowances. The Trustees wrongly understood that the ‘stockpiled
gains’ in the trust could be offset against personal losses, so that there would be
no capital gains tax liability. The beneficiaries were liable for significant capital
gains tax. The trustees applied for a declaration that the advancements were void
and of no effect on the basis of the rule in Hastings-Bass.
30.
Norris J applied the Rule in Hastings-Bass and rejected an attack to limit the
scope of the rule. He held that rule did not exist to relieve advisors from the
consequences of their mistakes, it existed to ensure that beneficiaries did not
47
suffer by an invalid exercise of a power by trustees .
31.
Norris J held that the claimant trustees had been given a discretion in
circumstances in which they were free to decide whether or not to exercise it.
They chose to exercise it but the effect of the exercise was different from that
which they had intended. The claimants had failed to consider the true fiscal
consequences, and had they done so would not have acted as they had done
because minimising the capital gains tax payable on the extraction of the funds
from the settlement was a priority. It was the perceived tax consequences which
determined the form of advances 48.
32.
Norris J reviewed the case law and found that tax liabilities generated by the
exercise of a power were treated as a "consequence" of the trustees' action
which altered the "effect" of the action itself 49. There is no distinction to be
drawn between "effect" and "consequences" as regards fiscal consequences.
46
47
48
49
Paragraphs 33 and 34. The finding was limited to private family trusts.
Paragraphs 4 and 28-29.
Paragraphs 18 and 27.
Paragraph 24.
Page 14 of 17
33.
Norris J found that the application of the Rule in Hastings-Bass resulted in the
Deed being void rather than voidable. A "change of position" defence would be
available to mitigate the consequences of a transaction being held to be void. As
the equitable remedy of seeking a declaration was discretionary matters affecting
the conscience of the parties could be considered, including laches or
acquiescence, by the court in deciding what, if any, relief to grant.
Jiggens v Low 50
34.
The case is a further recent application of the Rule in Hastings-Bass. A settlement
included a farm which had significant development value. To seek to save capital
gains tax an appointment was made by the trustees irrevocably appointing the
income equally between the beneficiaries. The trustees were advised that,
contrary to their previous understanding, the appointment may be treated as
tantamount to a capital appointment so as to trigger CGT and that the form of
appointment meant that any transfer of capital from the fund would not qualify
for holdover relief. The Trustees applied for a declaration that the deed of
appointment was void, pursuant to the Rule in Hastings-Bass.
35.
The Trustees contended that, had they been advised of the potential effects of
the deed, they would not have signed it. Roth J held that it was clear that the
trustees, in deciding to execute the deed, had not considered either that it might
well have constituted a disposal of capital because of the 'irrevocable' terms in
which it was expressed, or that it would have the effect of precluding a claim for
holdover relief from CGT on any disposal of capital. It was clear that the tax
consequences were very relevant matters and there was no reason to doubt the
evidence of the surviving trustees that if they had not misunderstood the effect
of the exercise of their power of appointment, they would have acted differently.
Even adopting a stringent application of the Rule in Hastings-Bass set out in the
authorities, the conditions which it prescribed were satisfied and the declaration
sought was granted, the deed was void from the outset51.
50
51
[2010] EWHC 1566 (Ch), Roth J.
Paragraphs 13 to 20.
Page 15 of 17
Future Developments
36.
It is understood that both the Futter case and Jiggens case may reach the Court
of Appeal52.
37.
As Norris J pointed out in the Futter case 53 “When the Court of Appeal fashioned
for the trustees of the 1947 settlement upon Captain Hastings-Bass a stout shield
against an attack upon the validity of their decisions by the Inland Revenue, the
members of the court cannot have supposed that they were creating for such
trustees a powerful weapon enabling them to attack their own decisions in the
face of objections by the Inland Revenue”.
38.
It is superficially unattractive that trustees put forward their own failings as
justification for the remedy they seek of setting aside the transaction resulting
from their decision. A remedy that is not available to those who cannot afford to
employ trustees to act for them. Norris J asked if the Rule in Hastings-Bass has
been diverted from its true course 54, but was constrained by previous High Court
authority to leave that issue for the Court of Appeal.
39.
It is for the Court of Appeal to decide if the operation of the Rule in HastingsBass should be restricted to circumstances where the law of mistake would
apply.
(1)
Relief for an operative mistake can apply to errors with regards to one’s
own property but is limited to errors that go the effect of the transaction
itself and not its unintended consequences 55. Unforeseen tax
52
The Guernsey Court of Appeal is considering the Rule in Hastings-Bass in the case of Gresh v HMRC GJ
42/2009. A Court of Appeal hearing in Smithson v Hamilton [2008] EWCA Civ 996 settled at the start of the appeal.
53
Paragraph 1.
54
See articles making this suggestion: Lord Walker The Limits Of The Principles In Re Hastings-Bass, Private
Client Business 26 February 2002. The lecture by Lord Neuberger Aspects of the Law Of Mistake to the Chancery Bar
Association 16.1.09 and the article by Mr Mark Herbert QC Is Hastings-Bass a Hardy Perennial 2009 Trust Quarterly
Review volume 7 issue 1 p.14.
55
Paragraph 27.
Page 16 of 17
consequences will not normally provide a ground to set aside a deed for
mistake 56.
(2)
The Rule in Hastings-Bass applies only in relation to failures in the
exercise of fiduciary powers over property beneficially owned by others 57.
A power which is improperly exercised is invalid and void. It is submitted
that this justifies a different test to the law of mistake.
(3)
The Court of Appeal may change the present formulation of the rule.
Possibly by seeking to limit its application by providing that the Court
‘may interfere’ rather than ‘will interfere’, so as to introduce a discretion
for the Court58.
John Dickinson
th
18 October 2010
[email protected]
St John’s Chambers
56
57
58
Paragraph 51.
Paragraph 43.
As suggested in an article in STEP Journal September 2010.
Page 17 of 17