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Mistakes? I've Made a Few... An Update on Hastings Bass

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 [2005] 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 Cases 

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. 

Mistake 

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 where:

  • 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 transaction; and 
  • 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 [2010] JRC068, and asked itself the following questions:

  • Was there a mistake on the part of the settlor/donor? 
  • 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 litigation; 
  • 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 "fairness";and 
  • 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 the outcome!

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