High Court allows trust to be unwound to avoid IHT
A recent High Court case examined whether a wife was entitled to unravel a settlement and an assignment made by her as receiver for her late husband as the inheritance tax consequences had been overlooked by her advisers.
The taxpayer’s late husband had been seriously brain damaged ina car accident and was unable to manage his own affairs. A damages claim was satisfied by way of a structured settlement worth £1.2m. The taxpayer, on the advice of her solicitor and financial adviser, created a discretionary settlement into which the annuity would also be assigned.
Although her advisers had considered the income tax and capital gains tax position at the time, the inheritance tax consequences were not taken into account. HMRC informed the taxpayer that an inheritance tax liability arose on the creation of the settlement, on subsequent capital distributions and on her husband’s death. It was accepted by all parties that if the taxpayer’s advisers had acted differently the inheritance tax charge could have been avoided.
The taxpayer’s appeal centered on whether the settlement could be avoided by application of the Hastings-Bass principle and /or on the grounds of a mistake.
The Hastings-Bass principle established that where a trustee exercises a discretion pursuant to the terms of the trust and the effect of the exercise was different from that intended, the court can set aside his action in certain circumstances.
The circumstances where the Hastings-Bass principle apply are either:
- Where the trustee had failed to take into account considerations which he ought to have taken into account, or
- Where the trustee had taken into account considerations which he ought not to have taken into account.
The High Court concluded that the Hastings-Bass principle applied in this case and that the settlement and assignment may be set aside as ineffective transactions. The High Court commented that although it was not strictly necessary they would also address the second alternative based on a mistake being made. The High Court commented that if the case had been taken solely on the basis of a mistake the claim would not have been upheld. However the decision was clear-cut on the application of the Hasting-Bass principle and the claim was upheld.