Rectifying Trustee Mistakes: Reconciling The Offshore And Onshore Approaches

• Published date: 06 September 2021
• Subject Matter: Corporate/Commercial Law, Tax, Inheritance Tax, Trusts
• Law Firm: Winckworth Sherwood
• Author: Mr James Gribbin and Dhana Sabanathan

Mistakes can occur in a number of ways when it comes to trusts. In the context of offshore trusts in particular, a simple mistake has the potential to give rise to a hefty and unintended tax liability. Fortunately, there are some routes which enable equity to prevail so as to relieve the trustees of their error. It is possible in some circumstances for the mistake to be rectified and any resulting tax liability removed as if the error never happened. Several offshore jurisdictions have "trustee friendly" legislation to assist in these circumstances, some of which has recently been tested.

Recent Jersey cases

Jersey has seen a number of recent cases involving a trustee mistake which has given rise to an unintended UK tax consequence or where the tax advice received was not correct. The Royal Court of Jersey decision in Re Grundy [2020] JRC 071 demonstrated the flexibility of the remedies available under Jersey law, with a successful application to set aside the exercise of a fiduciary power on grounds of mistake and/or inadequate deliberation. In this case, the Court held that the former trustee's decision to exclude the settlor's wife from the trust only had effect during the lifetime of the settlor, and that the exclusion was removed after his lifetime. This preserved the intended beneficial tax treatment behind the decision to exclude the settlor and his wife, but enabled the settlor's widow to benefit from the trust.

The Jersey Royal Court also heard the application of Re Q [2021] JRC 166, brought by the settlor himself, to set aside the trusts entirely and have them declared void on the grounds of mistaken belief as to the UK tax consequences.

In this case, the settlor had established the trusts by first settling nominal HK$10 onto each trust before then transferring significant amounts totalling '20m into them. The Court proceeded on the basis that as the settlor had established the trusts with the nominal amounts for the purpose of making the subsequent transfers, any mistake of the settlor's mind as to the establishment of the trusts concerned both sets of transfers.

It was found that the settlor's assumptions as to his domicile amounted to him operating under a mistaken belief when he settled the trusts, for two reasons:

1. He was under the belief that there was a risk that he might obtain a UK domicile at some later date. Instead, the actual risk was that HMRC would take the view that he had never in fact lost his UK domicile;
2. At the time of...