Jersey Unreported Judgments

Trust.

[2022]JRC052

Royal Court

(Samedi)

28 February 2022

Before     :

Sir William Bailhache, Commissioner, and Jurats Ramsden and Cornish

 

IN THE MATTER OF THE REPRESENTATION OF A

AND

IN THE MATTER OF THE E SETTLEMENT

Advocate R. J. McNulty for the Representor.

The Respondents did not appear.

 

judgment

the commissioner:

Introduction

1.        This was an application by the Representor under Article 11 and/or Article 47E of the Trusts (Jersey) Law 1984 (the "Law") to have a Declaration of Trust constituting the E Settlement on 2 April 2008 (the "Trust") set aside on the grounds of mistake and/or a declaration that any funds transferred and/or settled into the Trust are held on bare trust by R & H Trust Company (Jersey) Limited (the "Trustee") on behalf of the Representor and have been so held at all times, with further relief.  Notice of the proceedings was given to Her Majesty's Revenue and Customs ("HMRC") with a copy of the Representation and convening Act of the Court and the Court has seen a response to the effect that HMRC will not apply to be joined to the proceedings and do not intend to make any representations at the hearing.  The proceedings have been heard in private but the present judgment will be anonymised and published in the usual way.  A copy of the unredacted judgment is however to be provided by the Representor to HMRC.

The law

2.        This Court's approach to applications of this kind is well settled.  The Court considers the facts of the case against three questions:

(1)       Was there a mistake on the part of the Representor in relation to the establishment of the trust or the transfers of assets into trust?

(2)       Would the trust or transfers into trust not have been made but for the mistake?

(3)       Was the mistake of so serious a character as to render it just for the Court to make declaration?

3.        A recent summary of some of the relevant cases is set out in Q v Lutea Trustees Limited and Others [2021] JRC 166. 

The facts

4.        The Representor is the sole economic settlor of the Trust.  He has an English domicile of origin having been born in England and raised in that country and, following the separation of his parents, in Scotland.  He left the United Kingdom in 1959 and settled in Papua New Guinea, moving to Australia in anticipation of a declaration of independence by Papua New Guinea in 1978.  At that time, he was married to an American with whom he had two children and, although he has subsequently divorced and remarried, his first wife, both children and he all have Australian citizenship.  His children were educated in Australia.

5.        Having separated from his first wife, the Representor returned to the UK in 1993 to manage a substantial estate in the UK (the "Estate") which had been in the ownership of his family for decades, but it had fallen into disrepair over the years after his father's death.  The Representor and his first wife divorced in 1997 and the following year he married the First Respondent, and they have lived in the main hall on the Estate.  Although the Representor has retained substantial properties in Australia, his main source of income has been the farming income from the Estate.

6.        In 1996, on the advice of his accountants, he submitted a domicile application to HMRC which was ultimately accepted on 18^th February 1998 when the Inland Revenue wrote to his accountants to say:

"It is accepted that [the Representor] is not domiciled within the United Kingdom at present."

It is to be noted that the application for the acceptance of his Australian domicile omitted reference to his forthcoming marriage to the First Respondent, a person domiciled in England, which might have been thought to be a relevant factor, and the application also did not disclose the interest in property in the United Kingdom - technically accurate, but the Representor was certainly living and had the benefit of the Estate, a historic family estate to which we have referred. 

7.        There were further domicile inquiries by HMRC in 2016 and the following years.  On 26^th November 2020, formal notice was given to the Representor's accountants that HMRC was considering the question of the Representor's domicile at relevant times.  HMRC subsequently sent on 23^rd April 2021 a detailed letter to the Representor's accountants concluding that his domicile of origin had subsisted throughout his life to the present day, but alternatively, if he had acquired an Australian domicile of choice prior to 1993, which was not agreed, his England and Wales domicile of origin had revived prior to 2008.  Full details of the reasons for that approach are set out in the letter from HMRC.

8.        It is not for us to determine where the Representor was domiciled at different times in his life, albeit there is no doubt he had a domicile of origin in the United Kingdom.  However, the question of his domicile was clearly a matter of relevance in the context of the fiscal treatment of the Trust, to the details of which we now turn. 

9.        While resident in Papua New Guinea, the Representor purchased a coffee plantation and established himself in that business.  It became very successful and over the years he purchased three more plantations and a coffee marketing company.  He also established a trading arm which exported coffee to North America and Europe.  The coffee business was very profitable and in 1973 he established in Hong Kong a company called H Limited.  The Estate was owned in 1993 by a Trust of which the Representor's first wife and his children were beneficiaries.  It was held indirectly through an Australian operating company called I Limited.  Although hitherto managed by agents of I Limited, it was agreed with the Trustees of that Trust that the Representor would undertake the management of the Estate and ensure it was put on a sound footing for the benefit of his children, with a view to one of them taking over in due course. 

10.      Towards the end of 2007, the Representor became aware that changes to the United Kingdom tax legislation regarding UK resident but non-domiciled individuals were being discussed.  The Representor took advice.  We have seen a copy of some notes of a meeting between the Representor and his accountant and lawyer.  The First Respondent was also present.  The meeting note opens with the commentary:

"[The Representor] confirmed that he still intended to return to Australia at some stage.

If [the Representor] remains resident in the UK, he will become deemed domiciled on 6 April 2011.  This will only be relevant for inheritance tax purposes, and will have no impact on [the Representor's] domicile under the general law (relevant for capital gains tax and income tax purposes).

For inheritance tax purposes, the effect of [the Representor] becoming domiciled in the UK, will be that he will liable to inheritance tax on his worldwide assets.  In effect, therefore, this will bring into the UK tax net, his non-UK situs assets.  Essentially, these are [the Australian estate] and his holding of shares in H Limited."

11.      The same file note refers later to a different trust of which the Representor was the settlor and his children were beneficiaries.  The meeting note records that with effect from 6^th April 2008 the Representor would be liable to tax on any gains realised in that trust.  These would extend to any gains realised by I Limited.

12.      The discussion in this meeting then turned to H Limited.  The Representor is recorded as having confirmed that he owned the shares in H Limited, but that ownership had never been disclosed to HMRC.  There was an assumption that H Limited was a non-resident company, and in order to establish that, it would be necessary to show that the management and control of the company occurred offshore.  The Representor confirmed that management was conducted by a firm in Hong Kong, and that was where decisions were taken.  H Limited was registered with HMRC and paid tax on its UK income under the non-resident landlords' scheme.  All this was particularly relevant because there were two proposed transactions in the UK involving the sale of land.  There were two sales of land owned by H Limited in the UK - one at £450,000, which was expected to be completed in February 2008, but a much more substantial sale, for £2,600,000, which was a conditional sale subject to the securing of planning permission.  The meeting note records that if unconditional contracts were entered prior to 5^th April 2008, any changes to the capital gains taxation rules would not apply and the gains realised in H Limited on the sale of the land would not be attributable to the Representor.  However, after 5^th April 2008, the gains would be immediately taxable on him and would not be taxable on a remittance basis. 

13.      This meeting was, as it were, the critical opener to the arrangements which later followed.  However, it is clear from this meeting note that the Representor was aware that as of April 2011 he would be deemed domiciled in the United Kingdom and that that would have serious inheritance tax consequences.  It is also clear that capital gains on the two proposed transactions of land in the UK were a real issue if the proposed contracts could not be completed before 5^th April 2008.

14.      We have not been provided with detail as to the arrangements for the sale of the land but there are two important emails passing between the professional advisers of the Representor, into which he was copied.  On 11^th February, his estate agents sent an email to the Representor's lawyer who, it appears, was handling the property transactions in the UK.  The agents posed a number of questions of which one was - is there any risk of the past arrangements being challenged and set aside if [the Representor] dies while still resident in the UK?  The Representor's lawyer responded that 'HMRC accepted [the Respondent] was non-domiciled at the end of 1990s, as I recollect.  I think it would be all but impossible for them to go back on that'.  A few days later, the Representor's accountant sent an email directly to the Representor and the remaining professionals in which he added 'The new non-dom rules remain a moving target as business and political opposition to them continues to build'. 

15.      The second relevant subsequent email which we have seen was sent on 19^th March, by the legal advisers to the accountant.  It was said that there was a good possibility of exchanging unconditional contracts before 5^th April 2008.  However, although there were no absolute benefits identified in settling the H Limited shares before 5 April 2008, it appeared there were benefits in the long-term in doing this and there was no downside in doing so before 5^th April.  Indeed, there was a potential advantage because it would neutralise any thinking on the part of the purchaser that they had a good negotiating position against I Limited because of the latter's wish to exchange before 5^th April.  As was said in this email, settling the shares before that date would mean that as vendors they could not be 'pushed into a corner'.  The email also contains a potentially revealing comment that the Representor was attracted by the idea of stripping some funds out of H Limited before the gift of shares was made - these could be put in an offshore account in the names of trustees of a UK discretionary trust for the benefit of the First Respondent and the Representor's children.  The intention would be to have 'clean' funds which could be available to the First Respondent in due course as necessary without any offshore complications.  The accountants' response was that the H Limited shares should be settled before 5^th April.  The proposal to 'clean' funds for the First Respondent made excellent sense as it would enable the Representor to take advantage of this one-off opportunity to transfer funds for the benefit of the First Respondent in a tax free way. 

Discussion

16.      Although we accept that the law of domicile is not always straightforward, we do not think there is much doubt that persons in the position of the Representor would generally be expected to have a firm grasp of the headline issues - the fact that a person had a domicile of origin, and that he could, by a combination of residence and intention, abandon that domicile and acquire a domicile of choice elsewhere.  We also consider that most people in the position of the Representor would be well aware of the fiscal advantages in the United Kingdom from being a non-domiciled resident of the UK.  It is unsurprising that when there was the public debate about the tax treatment of non-domiciled UK residents in 2007/2008, the Representor not only became aware of that debate as relevant to him, but also saw the need to take professional advice.  This Court is not so naïve as to accept at face value statements by a settlor or economic settlor sometime after the event that he could not possibly have contemplated that very substantial tax liabilities might have been incurred as a result of the arrangements he was putting in place.  The arrangements in question were undoubtedly conceived with a view to preventing substantial tax liabilities or maintaining substantial tax advantages. 

17.      As has been said in some of the earlier cases, there is something fundamentally unattractive about the Court being asked to come to the rescue of those who have made arrangements with a view to saving themselves large amounts of tax, only to find later that for other reasons those arrangements were not as successful as had been contemplated.  We will come on to address the detailed questions we need to address shortly but it is important, in our judgment, to emphasise that there is all the difference in the world between a settlor taking a calculated risk in making particular arrangements and a settlor who is genuinely mistaken about the risks which he is undertaking.  In the former case, there should be no sympathy for such a settlor.  He gambled and lost.  In the latter case, the Court, as demonstrated by the authorities, looks with more sympathy on such a settlor because although his motivation - saving tax - remains the same, he carries no personal culpability, albeit his professional advisers probably do.  The approach which this Court has taken on many occasions in the past has been to relieve the settlor in the latter case from having to engage in risky litigation alleging negligence against professional advisers, with all the difficulties which may be incurred either with prescription, liability, or remoteness of damage.  Often, settlors in that position do not have deep pockets with which to fund such litigation, whereas the defendants or their insurers do, and there is frequently, perhaps almost invariably, the substantial stress of litigation often in the twilight years of the settlor's lifetime. 

18.      Against that background we now turn to the three questions.  The first is whether there was a mistake on the part of the Representor. The Representation is supported by all the Respondents.  HMRC have chosen not to engage.  It follows that there is no one to contend that the Representor did not in fact make a mistake at all. 

19.      The mistake which he alleges he made is that he failed to recognise that HMRC might be able to reopen the question of his domicile.  Analytically, the evidence on whether this was or was not so is capable of supporting either conclusion.  The correspondence in 1997 with the Inland Revenue showed that claims to have acquired a domicile of choice by abandoning the domicile of origin always needed investigation because a domicile of origin has strong and adhesive qualities.  There is a presumption in law in favour of its continuance and the burden of proving the acquisition of a domicile of choice lies on those who allege it has taken place.  Those comments by the Revenue in June 1997 were clearly discussed with the Representor because a very full letter addressing those comments was sent by the Representor's accountant to the Revenue in October that year.  In our view, looking at the matter objectively, anyone reading the Revenue's letter of 18^th February 1998 that 'It is accepted that [the Representor] is not domiciled within the United Kingdom at present' (emphasis added) could not possibly disregard the emphasised language.  It was as clear as could be that the Revenue were accepting the position for the time then being.  Of course, the time then being involved a man who had spent almost all his adult life out of the United Kingdom, having been a resident away from the UK between 1959 and 1993, a period of some thirty-three/thirty-four years.  If, despite that lengthy period away from the UK, the Revenue were not giving an unequivocal confirmation to last forever, how much more must the situation have been obviously in doubt by 2007 when the Representor's circumstances had changed - he had married an English woman and had at that point been living in the United Kingdom for fourteen years, returning only occasionally to Australia.  Not only was he living in the United Kingdom, but in particular was living in premises that had accommodated his family for decades.

20.      In those circumstances, the confirmation of the English lawyer for the Representor that it would be all but impossible for HMRC to go back on their acceptance that the Representor was not domiciled in the UK at the end of the 1990s is hard to accept.  The Representor ought to have realised it was hard to accept, at least as an unequivocal confirmation, because the covering email from the lawyer indicated that he was away that week but these were 'immediate comments'. 

21.      More favourable to the Representor is the email of 19^th March 2008 where the lawyer said unequivocally that he could see no downside in settling the H Limited shares before 5^th April 2008.  The lawyer ought to have realised that there was a potential downside if HMRC revisited the question of domicile; and we think perhaps he was influenced in part, at least, by the negating of any negotiating advantage which the purchasers of land at I Limited might have in any last minute departure from the agreed deal because of potential capital gains tax liabilities. 

22.      In this case there has been exhibited to the Representor's affidavit an amount of correspondence between the Representor and his lawyers and accountants at the relevant time.  The Representor makes it plain that he does not waive privilege in the advice obtained or in the documents provided.  We are not aware that this point has been tackled directly in the previous cases, but for the avoidance of doubt, we do not consider that it is a satisfactory approach.  Proceeding in this way in theory allows too much latitude to a representor to make a partial disclosure of the true position in circumstances where experience shows the Court will not have the benefit of contested argument.  In our judgment, it is essential that representors seeking relief of the kind requested in the present proceedings should provide all relevant correspondence and file notes for the Court's consideration.  This is likely to be essential in enabling the Court to make a proper assessment as to the merits of the settlor's claim that he or she has made a mistake. 

23.      In the present case, the Representor has deposed on affidavit that he was not advised as to what the inheritance tax consequences would be if in fact he were treated by HMRC as domiciled in the UK in April 2008 and that his advice to settle the H Limited shares in trust was to avoid personal liability for the resulting capital gains tax, mitigating the impact of the anticipated change to Section 13 of the Taxation of Chargeable Gains Act.  This would also have removed the pressure to exchange contracts for the sales of land before 6^th April 2008.  There is no evidence to the contrary, and despite the fact that common sense might suggest that the matter was more nuanced than has been contended for, such documentary evidence as there is tends to suggest that the submissions of the Representor are correct.  In those circumstances, with some hesitation, we have concluded on the balance of probabilities that the Representor did make a mistake in 2008 as to the possibility that HMRC would challenge his assertion that his domicile of choice in Australia might have been lost.

24.      The second question is whether the Settlor would not have entered into the transactions 'but for' the mistake.  The position at this stage is that it is unclear as to where the Representor was domiciled in 2008 for fiscal purposes.  What we do know is that HMRC have challenged the assertion that the Representor ever lost his domicile of origin in the United Kingdom, and have also challenged the assertion that, even if he did lose his domicile of origin, he still retained his domicile of choice in Australia in 2008.  If HMRC are correct in their analysis of domicile, this would give rise to very substantial inheritance tax liabilities.  We are told that it would amount to at least £604,988, plus interest of £202,943 if the inheritance tax liability is discharged by the Representor, or £483,990 plus interest of £178,354 if discharged by the Trust.  Furthermore, there is a ten year anniversary charge payable on the value of the Trust of £3,277,206 in April 2018, amounting to £196,632.  Interest running on this sum is currently not less than some £18,191.  In summary, the inheritance tax charges total some £1,025,112 if the Representor was domiciled in England at the date the Trust was set up in April 2008, approximately one-third of the value of the Trust.  We do not have difficulty in accepting the statements of the Representor that he would not have contemplated making the Trust had he been aware that potential liabilities of this scale might await him or the Trust. 

25.      In making this assessment, we record that after the hearing, we invited further submissions from the Representor on the potential capital gains tax liabilities and savings, had the sale transactions gone ahead without the Trust being made.  We made this request because it might have had a bearing on the mindset of the Representor at the time - if the potential capital gains tax liability were considerably higher than the potential inheritance tax liability, then the Court might have concluded that he might have gone ahead anyway, and that the mistake did not operate on his state of mind and the actions he took.  We are informed that contract for the sales of land in the UK were exchanged on 4^th April 2008.  As a result, the proposed changes to the fiscal regime had not come into effect and there was no CGT advantage in making the Trust on 5^th April, albeit there was a potential disadvantage in the event that HMRC changed their approach to the question of his domicile.  That disadvantage is now said to be academic as we are informed that HMRC are out of time for collection of the CGT that would have been due on the sale of the land if the Representor had been domiciled in the UK in 2008.  However, the additional information now provided shows that in fact the risks in making the Trust were much higher than the Representor thought to be the case even at the date of issuing the Representation.  We are satisfied that, in all the circumstances, the Representor would certainly not have made the Trust in 2008, had he not been operating under the mistake he was.

26.      The third question is whether the mistake was of so serious a character as to render it unjust on the part of the donee to retain the property.  In the present case, because the tax is assessable on the Trust as well as on the Representor, albeit the Trustee is resident in Jersey and there might be difficulties in enforcement, we do not consider there is any need to distinguish between measuring justice by reference to the position of the donee or the donor as discussed In the Matter of the S Trust and In the Matter of the T Trust [2015] JRC 259.  There is no doubt that the seriousness of the mistake can be analysed by reference to the effect both on the donor and potentially on the Trustee and the beneficiaries of the Trust.  The amount of tax due would be very substantial, and potentially catastrophic for the Representor and his family.  If we were not to make appropriate declarations setting aside the Trust or the transfers into Trust, there is a real risk of bankruptcy on the part of the Representor which, given that he is over eighty years old, would undoubtedly be extremely stressful.  Similarly, to embark on litigation with his English legal advisers in 2008, notwithstanding the apparently negligent advice which was given, could be long drawn out and equally stressful.  The Law, and the cases which have been before this Court previously on similar applications, provide us with a discretion to be exercised and we think this is an appropriate case in which to exercise it.

27.      For these reasons we think it is right to give relief, and we now turn to the precise nature of the relief which is sought. 

28.      Although the Trust was established by a Declaration of Trust rather than by a Settlement Deed, it was constituted by payment of £10,000 made by the Representor, as economic settlor, to the original trustees.  Furthermore, it is right to examine the circumstances in the round, and there is no doubt that the Declaration of Trust was directly linked to the tax advantages contemplated in the context of the immediate sale of the land in the UK.  Although relief could be justified under Article 47E, in our view the better course is to look at the establishment of the Trust itself and to make the declaration under Article 11 of the Law that the Trust is void ab initio on the grounds of mistake.  Pursuant to that declaration, we declare that any funds or any other assets transferred and/or settled into the Trust are held on bare trust by the Trustee on behalf of the Representor, and have been so held at all times. 

29.      Article 47I (3) of the Law provides:

"Without prejudice to Article 51 and subject to paragraph (4), the court may, consequential upon a declaration made under any of Articles 47E to 47H, make such order as it thinks fit."

30.      This paragraph confers a jurisdiction on the Court to make ancillary orders consequent upon a declaration that transfers into trust or the exercise of powers in relation to a trust or trust property were made by mistake.  Article 51 confers power on the Court to make orders concerning the execution or the administration of any trust; and we take this to include the execution or the administration of a bare trust.  In addition, we think the Court retains its inherent jurisdiction to provide appropriate remedies consequent upon the exercise of its jurisdiction to grant relief and that it therefore follows that although Article 11 does not of itself confer a jurisdiction to make ancillary orders similar to that contained in Article 47I(iii), the Court nonetheless has jurisdiction to do so for the reasons given.

31.      Accordingly, noting that the Trustee has with its predecessor trustees acted as Trustee since 2008, it is right to make the following additional orders.  We direct that the Trustee can retain the remuneration it has already charged and the reimbursement it has already received for expenses and liabilities reasonably incurred, and that it can continue to charge its reasonable remuneration and reimburse itself for all expenses and liabilities reasonably incurred up to the date of this declaration.  We further direct that the Trustee be relieved from liability in respect of any and all of its acts and omissions in connection with the bare trust prior to the date of the order granting the relief other than acts or omissions which constitute breaches of trust for which the Trustee would have been liable and in relation to which it would not otherwise have been exonerated or relieved under the Trust or the general law had the funds and/or shares not been declared to have been held on bare trust from the date the funds and/or shares entered the Trust. 

32.      Judgment is given accordingly.

Authorities

Trusts (Jersey) Law 1984. 

Q v Lutea Trustees Limited and Others [2021] JRC 166. 

In the matter of the S Trust and the T Trust [2015] JRC 259.