In The Matter Of The Representation Regarding The Strathmullan Trust [2014] JRC 056

This is the latest in a line of decisions of the Royal Court concerning an application to set aside a trust for mistake. It is the first decided case after the new Articles 47B to 47J of the Trusts (Jersey) Law 1984, as amended (the "Trusts Law"), came into force. Carey Olsen acted for the Trustee of the Strathmullan Trust.

Background

The settlor established the Trust, which was governed by Jersey law, in 1997, a few months after moving to the Isle of Man from the UK following the sale of his shares in the family business for £2.1 million. This was all following a number of discussions with various advisors about the sale of the shares in the business and a possible move offshore, which discussions focussed in particular on the means by which the family wealth could be preserved. The settlor knew of English inheritance tax and was advised that there was no inheritance tax ("IHT") in the Channel Islands or the Isle of Man. With this in mind, he moved to the Isle of Man and established the Trust.

The Structure

On 4 July 1997, a company was registered in Jersey (the "Company") and the £2.1 million proceeds paid to the Company. The two issued shares in the Company were initially held on trust for the settlor personally. When the Trust was established on 10 October 1997, the shares were transferred to the Trustee as the initial trust property. The only beneficiaries were the settlor and his wife and, later, the Jersey Blind Society was added. There were long stop trusts for charitable purposes.

The Problem

The correspondence leading to the formation of the structure showed that whilst consideration was given to the absence of IHT in the Channel Islands and the Isle of Man, no thought was given to the deemed domicile provisions in the UK tax legislation. This meant that, notwithstanding the settlor's move to the Isle of Man, he continued to be treated as domiciled in the UK for IHT purposes for three years after his move. Significant charges to IHT therefore arose in relation to the transfers into trust with the result that some 25% of the trust fund would ultimately be lost in tax if the Trust continued to subsist.

The Application

The settlor applied to have the Trust set aside on the grounds of his mistake. The Court noted generally that the settlor is the natural applicant in such applications, rather than the trustee, as it is normally the settlor who has made the mistake in setting up the trust in the first place.

Although the settlor could...