To err is human

The long-awaited decisions of the Supreme Court in Pitt v Holt and Futter v Futter will have significant implications for practitioners. The two lengthy and unanimous judgments (handed down on 9 May 2013) concerned applying the law of mistake to trustees' decisions.

Futter provides a definitive guide to trustees in applications under the rule in Re Hastings-Bass (a rule that provides for relief against mistake where the exercise of discretion resulted in tax or other consequences that were unintended). Pitt also provides guidance about the broader equitable jurisdiction to set aside a voluntary disposition for mistake.

Most trustees will be well aware of the rule in Re Hastings-Bass, which was a welcome 'get out of jail free' card for them in circumstances where they failed to properly consider (or consider at all) relevant circumstances before exercising a power or discretion. The effect of a successful application had led to instances where the settlor or beneficiaries avoided unintended significant tax consequences if the original exercise of the power or discretion was to stand.

The Supreme Court upheld the earlier Court of Appeal decision, which found that the Hastings-Bass rule had been applied too liberally. In effect, it brought an end to applications to reverse trustees' decisions based on professional advice. It is now clear that to invoke the rule in Re Hastings-Bass, trustees must have been in breach of trust or breach of duty, but where trustees act on apparently competent professional advice there is no breach of trust and hence no opportunity to set aside the exercise.

Voluntary disposition

In Pitt the Supreme Court found that the test for setting aside a voluntary disposition on the ground of mistake had been satisfied. Therefore, HMRC was only successful in defeating the Futter appeal in full.

The court emphasised that each case would be decided on its own merits and that flexibility in the court's options in such cases must be maintained.

Consequently, trustees must be mindful of the following:

• When seeking professional advice prior to making decisions, the court is only prepared to allow the Hastings-Bass rule to be applied in limited circumstances.

• Tax consequences are relevant considerations that trustees ought to take into account, but there is a danger of 'tax and tax avoidance driving out consideration of other relevant matters'.

• It will be inappropriate in most instances for trustees to challenge their own exercise of discretion; if they do, there is a risk that they will have to bear the costs of the application personally.

• The mistake is voidable, not void. This allows the court to apply equitable defences and grant relief in that regard.

• The decision has implications for professional advisers who may see negligence claims increasing if the trustees cannot use the court's discretion under Hastings-Bass to set aside their decisions.

• With regard to the equitable jurisdiction to set aside a mistake, each mistake will be assessed in the context of the facts of each case and upon its gravity: the question in each case is whether the mistake (of law or fact) is basic to the transaction.

• Applications to avoid a mistake as to tax consequences are more likely under the equitable jurisdiction, which will be applied broadly. It should be noted, however, that if the mistake concerns tax avoidance, the court may not grant relief.

Rule change

Previously, HMRC had reserved its right to give active consideration to participating in proceedings because of the potential tax implications. That concession gave way to direct interventions in Futter and Pitt. It leaves trustees with more restricted options to avoid a mistake.

Lloyd Junor is an associate at Thomas Eggar

He writes the regular in-practice article on wealth structuring for Private Client Adviser

Read about what Hastings-Bass means in Jersey