Lochmore Trust [2010] JRC 068

Lochmore Trust [2010] JRC 068

Facts

The settlor applied to court to set aside the Lochmore Trust (the “Trust”) on the grounds of the settlor’s mistake, and all beneficiaries of the Trust had confirmed their consent to the application. Tax advice that the settlor received suggested that shares held by Lochmore (as nominees for the settlor) (the “Shares”) ought to be contributed to the Trust for CGT savings, which contribution being made by way of sale with the price outstanding as a loan rather than a gift into the trust, to avoid an IHT charge at 20%, as the settlor was deemed to be domiciled in the UK for IHT purposes.

The settlor and Lochmore (the “Trustee”) arranged to establish the Trust, both parties signing the trust deed, which defined the trust fund as the Shares. The Shares were the sole trust property. Crucially, the tax advisers to the settlor did not review the deed prior to the Trust’s establishment.

The court accepted, and indeed was not requested to proffer an opinion on, the fundamental misunderstanding between settlor and Trustee, and this issue was not in dispute by any party. The settlor had thought the Shares had been transferred by way of sale as the tax advisers had proposed, but the Trustee was unaware of any such requirement and so merely transferred beneficial ownership of the Shares to the Trust. Therefore, a tax liability arose for IHT purposes of approximately £800,000.

The recent decision in Re the A Trust [2009] JRC 245 and its consideration of the different tests of mistake (particularly Gibbon v Mitchell (1991) 1 WLR 1304 and Ogilvie v Allen (1889) 15 TLR 294) were mentioned, and the test in the latter case was adopted, that being:

• Was there a mistake on the part of the settlor?
• Would the settlor not have entered into the transaction “but for” the mistake?
• Was the mistake of so serious a character as to render it unjust on the part of the done to retain the property?

It was accepted that there was a mistake of fact on the part of the settlor, as he had believed the transfer had occurred as a sale. The court agreed that it was clear that the settlor would not have entered into the transaction, established the Trust or contributed the Shares “but for” his mistake, as he was aware of the IHT charge.
The mistake was also viewed to be of “so serious a character” so as to render it unjust for the Trustee and beneficiaries to retain the Shares as trust property, which due to their being gifted, had created a substantial IHT liability which the settlor had not intended to incur. The court therefore declared the Trust established by mistake and subsequently invalid, the transfer being set aside.

Comment

Another example of the Royal Court being prepared to set aside a Trust on the grounds of mistake.

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