Edward Mackereth
Global Managing Partner | Legal
Jersey
Global Managing Partner
Jersey
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Insight
12 January 2016
Jersey
4 min read
ON THIS PAGE
In a recent decision1 the Royal Court has again considered the extent of the relief available under the doctrine of mistake in Jersey trust law in circumstances where the mistake has led to adverse tax consequences for settlors.
Since the enactment of the Trust (Amendment No 6) (Jersey) Law 2013, by which Jersey introduced a statutory basis for mistake in the form of Article 47E of the Trusts (Jersey) Law 1984 (the Law), there have been a number of decisions of the Royal Court in this area. However, those have been decided on the basis of the pre-existing law2. Whilst the Court (for example in In the Matter of the Strathmullen Trust3 the subject of our earlier briefing and The Representation of the Robinson Annuity Investment Trust4) had previously considered the potential application of Article 47E, the decision in the Great Escape Trust has taken the analysis further forward.
The facts concerning the S and T Trusts (the Trusts) can be summarised as follows. The respective settlors of the trusts had settled the trusts on the basis of advice from an English financial advisor with a principal aim of avoiding UK inheritance tax in respect of English properties. The scheme as recommended to the settlors involved funds being borrowed to repay existing mortgages on the English properties and the balance invested into gilts and other assets to be held in the Jersey trusts. The lending was secured on the English property and also by way of guarantees from the trustees, and was repayable only upon the settlors’ death. In fact, rather than avoiding inheritance tax, the scheme lead to significant inheritance tax charges including an immediate 20% charge, rendering the property subject to 10 yearly charges and potentially leaving the settlors with a deemed entitlement to the trust assets so as to bring those assets within their estates on death.
The Royal Court deliberated for close to 9 months before giving its judgment. Whether or not to grant the relief sought was clearly a matter of striking a careful balance for the Court but ultimately it decided to do so. The points of particular interest that arise from the decision in terms of the approach to applications of this kind are as follows.
The Court granted the relief sought, noting that the first two limbs of the test for mistake were unquestionably met. The Court also held that, on balance, the third limb of the test was also met on the basis that it would be just to set aside the transfers into trust, essentially in recognition of the stress that the families had suffered and the fact that there was a likelihood of further litigation if the relief was not granted.
The balancing act that the Royal Court carried out in this case is noteworthy from a number of perspectives. Whilst it is helpful to see further consideration of Jersey’s unique statutory mistake jurisdiction, there is a prospect of there being different legal tests depending upon whether an application is brought under the old (Article 11, Lochmore Trust) law or Article 47. It is interesting to note that HMRC took a step closer to becoming involved in a Jersey case, albeit limiting their submissions to writing. Having said that, the Royal Court was also mindful of its role and noting that there is something unattractive about it coming to the rescue of overseas tax payers seeking to avoid tax through schemes such as those in this case - the Court will have only limited sympathy for those people who later find things have not worked out quite as they had planned. The Court did, however, demonstrate the extent of the considerations it will take account of and, therefore, even where there was a lack of financial impact (given the indemnities agreed with the bank) it was prepared to find that justice (or lack of injustice) lay with setting aside the transfers and holding that the funds were held on bare trust for the settlors.
1 [2015]JRC259
2 Article 11 of the Trusts (Jersey) Law 1984 and the line of cases including In the matter of the Lochmore Trust [2010] JRC068
3 [2014] JRC056
4 [2014] JRC133
Edward Mackereth
Global Managing Partner | Legal
Jersey
Global Managing Partner
Jersey
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Nick Williams
Partner | Legal
Jersey
Partner
Jersey
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Steve Meiklejohn
Partner | Corporate and Fiduciary | Legal
Jersey
Partner
Jersey
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Marcus Leese
Partner | Legal
Guernsey, Hong Kong
Partner
Guernsey, Hong Kong
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This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
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