The 1974 case, Re Hastings
Bass established a principle that allowed the Court, in
certain circumstances, to set aside actions taken by trustees which
had unintended results, including tax consequences.
The rule in Hastings Bass was described
in Sieff v Fox  1 WLR 3811 :
"Where trustees act under a discretion given to them by the terms
of the trust, but the effect of the exercise is different from that
which they intended, the court will interfere with their action if
it is clear that they would not have acted as they did had they not
failed to take into account considerations which they ought to have
taken into account, or taken into account considerations which they
ought not to have taken into account."
The rule was intended to protect beneficiaries, but has also been
particularly useful for trustees who want to "turn back the clock"
because, for example, their actions have led to unintended tax
charges for the trust.
Recent Court of Appeal
Two first instance decisions, Futter v
Futter and Pitt v Holt, in which the rule
in Hastings Bass was applied to set aside the
actions of trustees/fiduciaries, have now been successfully
appealed by HMRC.
In summary the Court of Appeal has decided that:
- acts outside the scope of trustees' powers are void (i.e. they
will be treated for all purposes, including for tax, as if those
acts had never occurred);
- acts within trustees' powers are "voidable" under the correct
interpretation of the rule in Hastings Bass, where
the trustees have taken into account an irrelevant factor or failed
to take into account a relevant factor, but only if there has
been a breach of the trustees' fiduciary duty; and
- trustees will not be in breach of
their fiduciary duty, and their acts will be neither void nor
voidable, provided they take appropriate advice, even if the advice
turns out to be wrong.
Impact on Trustees
Trustees' ability to rely on the rule
in Hastings Bass has been significantly
restricted and where they have taken advice (which turns out to be
inadequate), the proper recourse will be against their professional
advisers in negligence rather than an application to Court for the
transaction to be avoided.
The costs of litigation in a contested negligence claim are likely
to be significantly higher than an uncontested application based on
the rule in Hastings Bass and the outcome may be
less predictable. Even if successful, trustees are also unlikely to
recover all of their costs.
In Pitt v Holt, it was argued that if
the rule in Hastings Bass did not apply, then the transaction
should be set aside applying the separate doctrine of "mistake".
The Court of Appeal held that this doctrine can only apply
- There is a mistake;
- The mistake is as to the legal effect (not the consequence) of
the transaction or as to an existing fact which is basic to the
- The effect of the mistake is sufficiently grave.
In Pitt v Holt the mistake was sufficiently
serious but the Court did not set aside the transaction because the
mistake was as to the tax consequences, not
the legal effect.
'Mistake' under Jersey law
Subsequent to the Court of Appeal decision in Pitt v
Holt, the Jersey Court has applied a different formulation of
the test to set aside a transaction on the grounds of mistake, in
the matter of the Representation of R (also known as the matter of
the S Trust).
R had transferred shares in a French family trading company to a
Jersey company, which then settled the shares on discretionary
trusts. R had been advised by UK lawyers (incorrectly) that no IHT
would be payable on the settlement. An IHT liability then arose
which R paid (proceedings against the UK lawyers were initiated and
settled on undisclosed terms). Unfortunately the principal
beneficiaries of the structure were US taxpayers, which meant that
any distributions could potentially be charged to tax in the US, to
an amount equivalent to the full value of any distribution. R was
resident and domiciled (for tax purposes) in the UK at the time of
the transfer and the trust was governed by English law. However
Jersey law was held to be the applicable law to the mistake on the
basis that the relevant law was the law of the place where the
donee's "enrichment" occurred. R asked the Jersey Court to set
aside the transaction on the basis of mistake arguing that had she
been properly advised, she would never have entered into the
transaction in the first place.
The Jersey Law Test
The Jersey Court applied the test set out in the
Jersey case of Re the Lochmore Trust  JRC068,
and asked itself the following questions:
- Was there a mistake on the part of the
- Would the settlor/donor not have entered into the transaction
"but for" the mistake?
- Was the mistake of so serious a character as to render it
unjust on the part of the donee to retain the property?
The court found that a mistake as to the potential
liability to tax on entering into the transaction was sufficient to
set the transaction aside at the instance of the donor.
The Jersey Court explained that they had not followed the Court of
Appeal decision in Pitt v Holt because
- It was unsatisfactory for clients to have to sue their
advisers, given the uncertainty and cost of hostile
- Although a donor should not easily be able to "unwind" a gift
just because things had not turned out as expected, there was a
sufficient hurdle for such a donor to overcome in the Jersey
formulation of the test, as the third limb requires the Court to
balance competing interests of the affected parties on the basis of
- The English test favoured the position of the tax authority, to
the prejudice of the individual.
While some cases which might previously have been brought
under the rule in Hastings-Bass may now be
advanced as "mistake" cases, this will not always be appropriate.
In any event, permission to appeal to the Supreme Court has been
granted in both Pitt v Holt and Futter
v Futter and we will of course report on