High Court Rescues Trustees from Severe Tax Consequences of Mistake

Emma Walker Watson Ramsbottom Solicitors

The role played by trustees can be legally complex and they are not immune from making mistakes that can, in tax terms, prove extremely costly. As a High Court ruling recently reviewed by Emma Walker showed, however, judges thankfully have the power to put matters right by correcting any such errors.

A woman used a pre-printed form to create a trust to hold a life insurance policy for the immediate or discretionary benefit of a number of her loved ones. The policy was worth over £2 million, but the trustees only became aware of its existence when a telephone call was received from the relevant insurer about eight years after the woman’s death.

The trustees, who were also executors of the woman’s will, executed deeds of appointment, by which they sought to apportion parts of the trust fund between various beneficiaries. However, they subsequently obtained advice from a specialist tax barrister that the deeds gave rise to an immediate charge to tax of £365,000, plus interest of £68,000.

In addition, 10-yearly Inheritance Tax charges would apply to the fund and payments out of it would be subject to exit charges. Faced with that deeply disturbing advice, the trustees applied to the Court to set the deeds of appointment aside.

Upholding their application, the Court noted that, when executing the deeds, the trustees clearly considered themselves to be entering into vanilla transactions that would have no serious tax consequences. In fact, they placed themselves at risk of involvement in a complex, and possibly litigious, dispute with HM Revenue and Customs.

The Court found that the trustees made an operative mistake in radically changing the interests in the trust of three of its beneficiaries. They clearly intended no such thing, and the error was sufficiently serious as to make it unconscionable not to set the deeds of appointment aside.

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