In Re R - The Waking Of Leviathan

The former Bailiff of Jersey, Sir Philip Bailhache has recently delivered a judgment in In re R [2011] JRC 117 which declines to follow the English Court of Appeal's test for mistake established in Pitt v Holt1. The judgment has significant implications for the future of mistake applications for settlors trying to avoid adverse tax consequences from negligent tax advice. The judgment may also mean that HMRC are afforded only a pyrrhic victory from the decision in Pitt v Holt.

The facts

The facts of R were not unusual in mistake applications. On the basis of tax advice the settlor had transferred to B Limited, a Jersey company, shares in a French company. B Limited in its capacity as trustee settled the shares on trust. The beneficiaries were the settlor's children and grandchildren and any future issue. At the time of the transfer the settlor was domiciled in England and as a result significant IHT arose in the sum of £1,943,689. Rather unusually the IHT charge was not what the mistake application was about. This was paid by the settlor and an action taken against the negligent tax advisors which was compromised. Further tax charges however were due to any distributions made to the beneficiaries who were US residents. No consideration had been given to these tax implications at the time of the transfer of shares. The implications were again significant, with a tax charge imposed of up to 100% of the value of the distribution.

The settlor gave evidence that but for the misleading and/or inadequate tax and legal advice she had received she would not have transferred the assets into the trust. She took advice from English Counsel in 2001 who at that stage advised no application could be made to rescind the transactions. In 2007 the settlor created a New Trust in which the equity of the first trust was settled. This transfer didn't give rise to any additional tax implications but both trusts remained within the IHT net, meaning that a 10 year anniversary charge would apply.

This application sought a declaration that the transfers into trust and the New Trusts were voidable.

HMRC's notification and attendance

The Royal Court gave some thought to whether in fact HMRC should be notified and convened to the application. This was based upon the Guernsey court's decision in HMRC v Gresh2 – even though that involved a Hastings Bass application. Importantly, the Court concluded that HMRC did not need to be notified or convened to the application.

The...