Taxpayer successfully applies Hastings-Bass principle
A recent High Court case considered the application of the Hastings-Bass principle. Once again the taxpayer was able to have a settlement unravelled after proving that the tax consequences had not been taken into account.
In this case the first claimant’s husband was awarded damages in respect of injuries he suffered from a car accident. As receiver for her husband, the first claimant put the money in a settlement.
After her husband’s unexpected death, HMRC noted that the form of the settlement meant that inheritance tax was due on the creation of the settlement, on subsequent capital distributions, after ten years, and on the husband’s death. The aggregate amount of tax at stake was in excess of £300,000.
Neither the first claimant or her advisers had considered the inheritance tax position when setting up the trust. Had they done so and realised the impact the tax would have on the value of the damages, they would have created a different kind of settlement to avoid the problem.
As a result, the first claimant asked to have the settlement unravelled, invoking the Hastings-Bass principle. HMRC however argued that this was an inappropriate case to apply that principle and that the first claimant should instead pursue her action for negligence against her advisers.
The judge in the High Court agreed that the Hastings-Bass principle applied in the circumstances. It was obvious that anyone thinking about setting up a discretionary settlement should take the various tax consequences into account. As a result of not having done so, the amount of damages had been seriously reduced by a large and wholly unnecessary tax bill. There was no doubt that if the first claimant had been aware of the potential inheritance tax charges, she would not have entered into the settlement, but clearly neither she nor her advisers had given any thought to inheritance tax.
The judge therefore concluded that the settlement should be set aside.