UK Supreme Court decision in Pitt v Holt and Re Futter 2013
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Hastings-Bass was a case that set the precedent whereby discretionary acts by trustees may be set aside if the decisions made had unintended consequences. The unintended consequences were usually unexpected tax liabilities. Historically the Rule has been used to set aside decisions made by trustees who have have accidentally failed to take into account relevant circumstances or where they have taken incorrect professional advice. As a consequence of the Rule the trustees and beneficiaries are re-set into the position they were in before entering the adverse transaction.
In Pitt v Holt, Mrs Pitt was the widow and personal representative of Mr Pitt and she was his receiver appointed by the Court of Protection. Mr Pitt was badly injured in a road accident in 1990. His personal injury claim was successful and was settled on the terms that Mr Pitt received a lump sum as well as monthly payments. With the benefit of professional advice it was decided to put both the lump sum and annuity into a discretionary trust for Mr Pitt’s benefit. It later became apparent that the transfer to the trust had unintended adverse inheritance tax consequences that could have been avoided had the trust been drafted correctly. Accordingly, the personal representatives of Mr Pitt claimed a declaration from the Court that the settlement into the trust should be set aside. At first instance, the judge held that the trust should be set aside under the Hastings-Bass rule.
The issue in Futter v Futter arose from the exercise by the trustees of powers of advancement under two discretionary trusts. Legal advice was taken in this connection and the intention was to advance ‘stockpiled gains’ from offshore trusts to UK residents in such a way as to avoid incurring a charge to capital gains tax. The attorneys incorrectly advised that the losses incurred for capital gains purposes by the recipient beneficiary could be off set against the stockpiled gains. Again, at first instance, the judge held that the advancements were vitiated under the Hastings-Bass rule and should be set aside.
HMRC has successfully appealed both cases. Lord Walker has now clarified the nature of the rule and removed any ambiguity as to the distinction between “effect” and “consequence” in the law of mistake. In respect of the rule in Hastings Bass, the Supreme Court held that there must be an inadequate deliberation on the part of the trustee which was sufficiently serious to amount to a breach of fiduciary duty. If trustees follow apparently competent advice then it does not constitute a breach of duty. Subsequently the judgment has reduced the ability of trustees to be absolved from the untoward consequences of their mistakes. If the Court determines that a trustee has breached their fiduciary duty then the trustee’s action can be voidable. However, the recent shift in the interpretation of the Rule should be contemplated seriously by trustees, beneficiaries and legal advisers alike.