The never-ending story
The decision in Pitt v Holt and Futter v Futter  EWCA Civ 197, and the recent judgment of the Supreme Court, have limited the Hastings-Bass rule. In Pitt, an alternative ground of appeal for mistake failed in the Court of Appeal but succeeded before the Supreme Court.
In 2004, two UK-resident individuals became trustees of two settlements. On the advice of solicitors, the trustees made two distributions, under a power of enlargement and a power of advancement respectively, believing that trust gains would be attributed to the beneficiaries as if realised by the beneficiaries themselves. The trustees also believed, incorrectly, that trust gains could be offset by allowable losses, cancelling out any capital gains tax liability. Consequently, the beneficiaries suffered a charge to capital gains tax. The trustees applied to have the distributions declared void.
Derek Pitt suffered injuries in an accident, leaving him permanently incapacitated. On the advice of financial advisors, his damages were settled in a discretionary settlement, with Court of Protection authority. Had the settlement been an interest in possession trust, or had it complied with s89 of the Inheritance Tax Act 1984 (IHTA), there would have been no immediate inheritance tax liability. As matters stood, an immediate liability of GBP100,000 arose.
Mr Pitt commenced proceedings against the financial advisors for professional negligence. After his death, his personal representatives sought to have the settlement set aside under the Hastings-Bass rule or, alternatively, for mistake.
Hastings-Bass: the current position
Under the rule, where a trustee exercises a discretion, the court should not interfere, unless it is unauthorised, or it is clear that the trustee would not have acted as it did if it had not taken into consideration factors that it ought not to have considered, or failed to take into account factors that it ought to have considered.
The Court of Appeal allowed HMRC’s appeals against the first instance decisions in Pitt and Futter, holding that trustees’ actions are void if they act beyond their powers. If the trustees’ act is within their powers, but they have breached their duty in its exercise, the action is not void, ‘but may be voidable at the instance of a beneficiary who is adversely affected’.
On these facts, the trustees’ and receiver’s actions were not beyond their powers and so were not void. Nor were they voidable, as the trustees and receiver acted in accordance with their fiduciary duty, seeking professional advice to determine the correct course of action.
Lloyd LJ’s seminal judgment on this point was followed by the Supreme Court. For trustees, therefore, Hastings-Bass is no longer what Lord Neuberger once described as a ‘magical morning-after pill’. A trustee decision within the terms of the relevant power will not be voidable where the trustee takes reasonable steps, relying on professional advice. Instead, an action for professional negligence may be available to trustees. While it may now be rare for trustees to be able to make a successful Hastings-Bass application, beneficiaries may do so if they can show that trustees were in breach of fiduciary duty.
Lloyd LJ allowed HMRC’s appeal in Pitt concerning mistake. He previously reviewed English authorities on mistake in the High Court in Sieff v Fox 1 WLR 3811. The narrow test, formulated by Millet J in Gibbon v Mitchell  1 WLR 1304, required the mistake to be about the effect of the transaction, not merely its consequences. The wider test in Ogilvie v Littleboy (1897) 13 TLR 399 enabled a transaction to be set aside where the mistake was of ‘so serious a character as to render it unjust for the donee to retain the property’. Ogilvie, although higher precedent, was not cited for years, until raised in Sieff. Lloyd LJ stated that, under Gibbon, a mistake about tax consequences would not be sufficient to set aside a transaction, although it might be sufficient under the wider Ogilvie test.
In Pitt, Lloyd LJ restated the test for setting aside a voluntary disposition for mistake:
Where (i)–(iii) are satisfied, the transaction may be set aside. In Pitt, the respondent had not made any mistake about the legal effect of the disposition, but rather its tax consequences. As the three necessary elements were not all present, the transaction could not be set aside for mistake.
The Supreme Court disagreed, determining that a decision to set aside a transaction for mistake could not be subject to a set of hard and fast rules. The court must have regard to the existence of the mistake, the mistake’s degree of centrality to the transaction, and the seriousness of the consequences in deciding whether to set aside the transaction. The court should make an evaluative judgment about whether it would be unjust to leave the mistake uncorrected. Here, there was nothing artificial or abusive about attempting to attain protection from an inheritance tax liability under s89 IHTA. As such, Mrs Pitt was in error about the effect of the transaction. The Supreme Court ruled that the settlement should be set aside on the basis that Mrs Pitt was under a mistake about the tax consequences of the settlement.
The Supreme Court wished to limit the application of the mistake jurisdiction, saying that, had mistake been raised in Futter, there would have been an issue of importance about whether the court should assist in extricating claimants from a tax-avoidance scheme that had gone wrong.
The Jersey position
In In re the matter of the A Trust  JLR 447, an application was made to set aside a transaction on the grounds of mistake as to the tax consequences of a transfer. The Jersey Royal Court considered whether the Gibbon or Ogilvie test should apply in Jersey law.
The applicant argued, alternatively, that the transaction should be set aside under Gibbon because she did not understand the legal effect of the transaction. The Royal Court agreed that the mistake in question fell within the ambit of Gibbon. However, it went further, indicating that Ogilvie was the correct test for mistake under Jersey law and that tax consequences could therefore be of sufficient gravity as to be within the jurisdiction.
On Lloyd LJ’s view in Pitt, the offshore decisions did not accord with English law, because applying a ‘but for’ test for mistake is too relaxed an interpretation of Ogilvie, failing to take account of the distinction between effects and consequences. The Supreme Court judgment now suggests that offshore and English law are in alignment.
In In re S Trust  JLR 375, the former Bailiff of Jersey declined to follow Lloyd LJ’s decision in Pitt; instead he applied the test from Re A on the grounds that it did not ignore the distinction between effect and consequences but preferred Ogilvie; it gave adequate effect to the gravity of the Ogilvie test because of the stringent application of questions; and the Royal Court saw no need to protect HMRC, stating that ‘Leviathan can look after itself ’. In the 2012 case of In the Matter of the B Life Interest  JRC 229, the Royal Court confirmed the principles applied in Re A in relation to the test for mistake.
Before the Court of Appeal decision in Pitt and Futter, the Hastings-Bass rule was considered to be well-established under Jersey law. In In the Matter of the B Life Interest, however, the Royal Court indicated that, if the Court of Appeal decision in Pitt and Futter were to stand, ‘then a departure from the line of reasoning in the judgments of the Royal Court based on the previous authorities is inevitable’. Jersey would either have to follow the changed approach of the English courts or find reasons to follow the historical approach.
The Royal Court found that it did not need to determine whether the historical Hastings-Bass test still applied; however, the Deputy Bailiff indicated that had this point required determination in the light of the then existing Jersey and English authorities, it would have decided that the Royal Court’s previous decisions were ‘clearly wrong’.
The development of the Jersey position following the Supreme Court judgment ratifying the Court of Appeal decision is likely to be pre-empted by news that Jersey may adopt the Hastings-Bass rule into legislation. The details and scope of any such rule are as yet unclear.
Two conclusions follow from the Supreme Court judgment. First, as long expected by trustees and trust lawyers, the Hastings-Bass rule has been extremely restricted in its application.
Second, the Supreme Court has, surprisingly, taken a similar view of a mistake application as the Jersey Royal Court. Therefore, in future, the kind of applications previously made under the Hastings-Bass rule may well be brought on the grounds of mistake. In Jersey, this may be subject to any Hastings-Bass-type rule introduced in legislation. It remains to be seen how HMRC reacts to such applications. Under a mistake doctrine the remedy is equitable, meaning that the English courts will take into account all third-party interests before determining whether to set aside any settlement. In Pitt, HMRC’s interest did not prevent the Supreme Court concluding that equity should intervene. The story therefore continues.
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