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N2-10a: Rescission for mistake
Rescission in the FTT
"[78] The question before me therefore is, having found that Mr Hymanson would be granted an order of rescission from the High Court were he to go to the High Court, should I then force him to go through that process, at the cost of significant expense and time, or should I attempt to short-cut the process.
[79] Proudman J summarises the position in Lobler , at [47] and [48] as:
“Thus although the FTT did not itself have power to order rectification, it could determine that if rectification would be granted by a court who does have jurisdiction to grant it, Mr Lobler’s tax position would follow as if such rectification had been granted.
It has never been suggested that before the effect of the availability of specific performance can be taken into account by the FTT, the appellant must go to court and actually obtain the remedy of specific performance. On the contrary, the cases show that this is not the case: see Oughtred v. IRC [1960] AC 206, Jerome v. Kelly [2004] UKHL 25, BMBF (No 24) Limited v. IRC [2002] STC 1450 and HSP Financial Planning Limited v. HMRC [2011] UKFTT 106 (TC). A tribunal such as the FTT must however take into account all the factors that the Court would in deciding whether specific performance would be available, such as whether damages would be inadequate, whether specific performance would require constant supervision, whether the appellant is ready, willing and able to perform, hardship and so on.”
[80] In this case we are not of course talking about rectification. Rectification would not be an appropriate remedy in this case because that would leave the essential elements of the transaction, ie the additional payments, intact. Nor are we considering the remedies of damages or specific performance, neither of which would be appropriate. In this case the only effective remedy would be rescission.
[81] Mr Waldegrave, for HMRC, said that HMRC believe that Lobler was wrongly decided. This may be so, but it is binding on me unless I can find sufficient distinguishing features that would lead me to a different conclusion.
...
[92] I therefore come to the conclusion that Mr Hymanson would be entitled to rescission if he were to take his case to the High Court and that his tax position should therefore to be determined as if that remedy had been granted." (Hymanson v. HMRC [2018] UKFTT 667 (TC), Judge Gillett)
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No equitable rescission of a contract for mistake (only common law principle applies)
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"[24] There are two quite distinct sets of rules dealing with setting aside, or declaring to be void, transactions on the ground of mistake. Later in this judgment, I will attempt to describe the two different types of case where the different rules apply. For present purposes, it is sufficient to say that one set of rules applies to contracts and the other set applies to gifts.
[25] In a case concerning a contract entered into as the result of a mistake, the relevant legal principles are those expressed in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd ("The Great Peace") [2003] QB 679. This case established that there is no equitable jurisdiction which allows a court to order rescission of a contract for common mistake in circumstances that fall short of the circumstances in which the common law would hold the contract to be void. The grounds on which a contract could be declared void for mistake at common law are very narrow. They were described in The Great Peace at [76] as follows:
"the following elements must be present if common mistake is to avoid a contract: (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible."
It was common ground that if the contract rules apply in this case, the Claimant cannot satisfy them." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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- Distinction depends on whether consideration has been given for the benefit conferred by the transaction
"[31] In my judgment, the difference between the cases where the equitable rules apply and those where they do not turns on whether consideration has been given for the benefit conferred by the transaction. If the effect of rescission (or a declaration that a transaction is void) would deprive a party of a benefit for which he gave consideration, then the common law rules apply and there is no separate equitable jurisdiction to order rescission. Conversely, if the effect of rescission would deprive a party of a benefit for which he gave no consideration, then there is a separate equitable jurisdiction to order rescission, applying the principles in Pitt v Holt..." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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- Equitable principle does not apply to transfer even if prior contract void
"[31] ...Although the argument in the present case focussed on whether the Claimant and the First Defendant made a prior contract to execute the settlement and the transfer of 27 March 2006, the present issue does not turn on whether there was such a prior contract. Consideration can exist for an ante-nuptial marriage settlement even though the intended husband and wife did not make a prior binding contract. Further, to take an example suggested by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, if A and B enter into an apparent contract, which is void by reason of that section, but they nonetheless complete the intended transaction by A transferring a property to B in return for the agreed price, A could not seek to set aside that transfer in reliance on the equitable rules by pointing out that the apparent contact was void so that there was no prior contract. The transfer is itself a contract for which consideration is given by both parties." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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- Transfer from wife to husband to allow creation of settlement analysed as resulting trust, not consideration for informal agreement
"[35] In view of the fact that the law of resulting trusts produces a fair and rational result in this case, I am not persuaded that it is necessary or appropriate to hold that the facts also give rise to the implication of an informal contract between the Claimant and the First Defendant. In those circumstances, it is not necessary to consider the effect of section 2 on such a contract. Nor am I persuaded that the transfer of 24 March 2006 to the Claimant alone was by way of an outright gift. The First Defendant did not intend to give the property to the Claimant beneficially for him to do with as he pleased. She transferred the property to the Claimant alone so that he could carry out their common intention to create the intended settlement. When the analysis based on the law of resulting trusts was identified in the course of argument, the Claimant and the First Defendant adopted that analysis as an alternative to their submission that the transfer of 24 March 2006 was by way of gift." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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- Joint owners taking steps to create settlement is a unilateral transaction by them, for no consideration
"[37] Considering the transactions as a whole, the position is as follows. Before 24 March 2006, the Claimant and the First Defendant as the legal and beneficial owners of the property wished to settle the property on themselves and their children and remoter issue. By taking two steps on 24 and 27 March 2006 they implemented their intentions. The position of the two of them acting together is no different from the position of a sole legal and beneficial owner settling his property on himself and members of his family. He and the other beneficiaries do not give consideration for the settlement. Using the language of the decided cases, the case is one of a unilateral transaction and all of the beneficiaries are volunteers. I do not see how the fact that the settlors are joint owners acting together leads to any different conclusion. They do not give consideration to themselves." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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Nature of the transaction to be set aside
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- Appointment as a trustee can be rescinded (at least on grounds of undue influence)
"[23] For reasons that I will give shortly, I disagree with elements of this analysis but even if it were correct I do not see in principle how it could stand in the way of the Appellant asking the Court to set aside her acceptance, a unilateral act by her, which was the result of undue influence, so that she would be able to disclaim the appointment, which was the position she was in just before she signed the DORA.
[24] Mr Le Poidevin makes clear that I am not asked to declare that such a disclaimer would necessarily be effective since, for example, there could be other later matters which would prevent it. By allowing the acceptance to be set aside, I would only (though it might be very important) be putting the Appellant in a position to disclaim." (Mackay v. Wesley [2020] EWHC 3400 (Ch), Meade J)
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- Query whether limited to dispositions of property
"[42] Both these concepts relate to a bilateral contract. The remedy sought with common law mistake is that the contract is void. However, I do not agree with Mr Davey that this is necessarily the case with the result that rescinding or rectifying just one part of a transaction is not possible: see the decision of Scott J in Re Cleveland plc [1991] BLC 424 and Lord Wright’s statement referring to “contract or transaction” above. It seems to me that the doctrine of mistake is not limited to the formation of the contract and a withdrawal from a life insurance policy can in principle give rise to it." (Lobler v. HMRC [2015] UKUT 152 (TC), Proudman J)
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"[139] As regards the second of the reasons for the equitable principle not applying: the equitable principle sought to be relied upon by the Claimant is concerned with mistaken gifts or voluntary dispositions. The whole of the relevant part of Lord Walker's judgment in Pitt v Holt is premised on that being the scope of the principle. The passage from Sir Terence Etherton C's judgment in Kennedy v Kennedy [2014] EWHC 4129 (Ch), [2015] WTLR 837 at paragraph 36, quoted above confirms that the principle or jurisdiction is concerned with setting aside a non-contractual voluntary disposition. In the present case the Claimant did not dispose of anything. At most she undertook the liabilities of a trustee and received the trust property. This reason applies even if, contrary to my judgment, the Claimant's acceptance was necessary in order for her to become a trustee." ​(Mackay v. Wesley [2020] EWHC 1215 (Ch), Deputy Master Henderson - overturned on appeal regarding rescission for undue influence)
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On appeal
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"[13] Mr Le Poidevin submitted at the hearing that the result would be the same if the Appellant succeeded on mistake, undue influence, or both. I agree. Since, for reasons given below, I accept the Appellant's submissions on undue influence and will allow the appeal and make an order for rescission, I am not going to decide the points which arose only on mistake. They are complex and potentially important; they would be better decided in a context where both sides are fully argued; and writing a judgment on them would slow down the provision of my decision to the Appellant." (Mackay v. Wesley [2020] EWHC 3400 (Ch), Meade J)
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- Setting aside Trustee decision to approve issue of shares and, consequentially, the issue of the shares (Jersey law)
"[17] So as a technical matter we think that if the orders are to be made in relation to the companies which are wholly owned by the Trust, then these are orders which can only be made as consequential under Article 47I(3). It was thus right that the companies should be party to these proceedings. On the facts of this case, we are satisfied that it is right to look at the actions taken by the companies as consequential upon decisions of the trustee, and accordingly, if it is right to grant relief in relation to the alleged mistake of the trustee, it is right to make consequential orders in relation to the steps taken by the companies giving effect to the trustee’s decisions.
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[35] For all those reasons we declare that the following decisions of the trustee are voidable and of no effect and consequentially we set aside as invalid and of no effect:-
(i) The special resolution passed by the Second Representor and the First Respondent on 29th March, 2017 as members of the Second Respondent, having been made ultra vires without the trustee’s instructions or authority, and that no new memorandum and articles of association were adopted and no A or B preference shares were created.
(ii) The decisions of the directors of the Second Respondent to issue and allot the A and B preference shares to the trustee, recorded in the minutes of 24th March 2017." (Re J Settlement [2019] JRC 111 - concerned Jersey legislation applying trustees rather than the equitable principle)
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Company transactions
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- Consider the intention of the board
"[97] The second point to make concerning the evidence relates only to the two corporate claimants, Dukeries and Riverside. It is trite to record that:
(1) Dukeries and Riverside could only act through their board of directors.
(2) When determining whether Dukeries and/or Riverside were acting under a causative mistake of sufficient gravity, it is necessary to consider what was the collective intention of the board. [7] That will normally comprise a review, if they exist, of minutes of meetings of the board. However, in a case in which the provider of a tax avoidance scheme produces pro-forma minutes, it is likely to be necessary for the claimant to provide evidence that the minutes actually reflect the intentions and understanding of the board at the time." (Dukeries Healthcare Limited v. BayTrust International Limited [2021] EWHC 2086 (Ch), Deputy Master Marsh)
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(1) Mistaken belief or assumption
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- At the time of the transaction
"[108] The claimant must have been operating under a distinct mistake at the time that claimant made the voluntary disposition it is now sought to rescind. As such, the court is required to inquire into the mindset of the claimant at the moment he or she entered into the transaction being avoided, though evidence of the claimant's mindset at some subsequent time may allow the court to form a view as to whether the claimant was operating under a mistake at the relevant time. In Wright v National Westminster Bank plc,[39] for example, Norris J considered the evidence provided by an independent financial adviser as to the claimant's state of mind two months after he had entered into the transaction he sought to set aside as indicative of the claimant's state of mind at the time he entered into the transaction. In that case, the independent financial adviser's evidence that the claimant clearly thought his wife could benefit from the trust he had settled supported the claimant's own evidence that he had mistakenly considered this to be the case at the time he settled the trust. Similarly in Rogge v Rogge,[40] the court was willing to set aside a number of voluntary transfers to a trust made between 2009 to 2015, as the court formed the view that the claimants were still labouring under the same relevant mistakes throughout that period. However, once the claimants became aware that the circumstances were not as they had previously thought them to be, any further payments could not have been said to have been made under the original operative mistakes." (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J)
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- Unilateral mistake sufficient for unilateral transaction
"[114]...Nor need the mistake be known to (still less induced by) the person or persons taking a benefit under the disposition. The fact that a unilateral mistake is sufficient (without the additional ingredient of misrepresentation or fraud) to make a gift voidable has been attributed to gifts being outside the law's special concern for the sanctity of contracts (O'Sullivan, Elliott and Zakrzewski, The Law of Rescission (2007) para 29.22):
"It is apparent from the foregoing survey that vitiated consent permits the rescission of gifts when unaccompanied by the additional factors that must be present in order to render a contract voidable. The reason is that the law's interest in protecting bargains, and in the security of contracts, is not engaged in the case of a gift, even if made by deed."
Conversely, the fact that a purely unilateral mistake may be sufficient to found relief is arguably a good reason for the court to apply a more stringent test as to the seriousness of the mistake before granting relief." ​(Pitt v. Holt [2013] UKSC 26)
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"[32] Although a unilateral mistake is sufficient in the case of a unilateral transaction (such as a voluntary settlement) the fact that it is a unilateral mistake may be a good reason for the court to apply a more stringent test as to the seriousness of the mistake before granting relief and avoiding the settlement: see Pitt v. Holt at [114]." (Freedman v. Freedman [2015] EWHC 1457 (Ch), Proudman J)
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"[11]...First, in the case of a unilateral transaction such as a voluntary settlement it is uncontroversial that a unilateral mistake is sufficient (without any element of misrepresentation or fraud) to make a gift voidable..." (Wright v. National Westminister Bank [2014] EWHC 3158 (Ch), Norris J)
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- Mistake as to honesty of adviser not sufficient
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"[88] Even on the basis of the Appellants' pleaded case, however, I do not consider that a mistaken belief as to the honesty of one's own adviser is a type of mistake which can possibly justify setting aside a gratuitous disposal in favour of a third party donee who has no knowledge of the dishonesty.
[89] To pick up Lord Walker's comments on the second stage of his analytical framework at [122] of Pitt v Holt, such a mistake is not basic to the transaction. Indeed, it does not relate to the transaction at all. A person who is not complicit in any impropriety who seeks advice from a professional adviser will naturally believe that the adviser is acting honestly, irrespective of the nature or details of the transaction in question.
[90] The victim of a dishonest adviser may have other remedies, but in my view it simply cannot be a basis for invoking the equitable jurisdiction in mistake that they later discover, contrary to their belief at the time, that the adviser had acted dishonestly. Indeed, since a donor will also invariably believe that their adviser is careful as well as honest, were this to be a basis for invoking the equitable jurisdiction in mistake, it would open the door to any gratuitous disposal being set aside on the basis of the negligence of the professional adviser. There is no indication in the decided cases that this is, or has ever been thought to be, the law." (Bhaur v. Equity First Trustees (Nevis) limited [2023] EWCA Civ 534, Snowden, Lewison, Arnold LJJJ)
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Mistake not misprediction
"[109] A misprediction relates to some possible future event, whereas a legally significant mistake normally relates to some past or present matter of fact or law. But here too the distinction may not be clear on the facts of a particular case. The issue which divided the House of Lords in Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349 was whether (as Lord Hoffmann put it at p398) the correct view was that, "a person who pays in accordance with what was then a settled view of the law has not made a mistake" and "that his state of mind could be better described as a failure to predict the outcome of some future event (sc a decision of this House) than a mistake about the existing state of the law." There is another interesting discussion of this point in the judgments given in the Court of Appeal in Brennan v Bolt Burdon [2005] QB 303." (Pitt v. Holt [2013] UKSC 26)
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- Some level of doubt consistent with mistake
"[26]...(ii) Mistakes can co-exist with an element of doubt. By "doubt" is meant the claimant's conscious appreciation that the facts or law may not be as he or she believes them to be. See Goff & Jones, paras 9-18, 9–21 and 9–24–9–25; Restatement, p 68. For example, a claimant may (wrongly) believe that he or she is legally obliged to make a payment, whilst at the same time appreciating that there is an argument that he or she is not in fact obliged to make the payment at all. Such doubts are not inconsistent with mistake, provided the doubt does not overwhelm the mistake…"" (Elston v. King [2020] EWHC 55 (Ch), Marcus Smith J)
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- Mistake of law as a result of subsequent case law: how clear was the previous position?
"[30(2)]...Reverting to my crude example in the preceding sub-paragraph, a mistake will more likely arise where a well-established and unquestioned rule of law is dramatically overturned than where a single decision on a new and difficult point is overruled. The latter case, particularly if, pace Bodey J, the parties to a compromise should not be treated as ignorant of the fact that the common law develops (a view I entirely agree with), is a case of misprediction.
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[35] ...Both parties were aware that Raithatha was a first instance decision on a novel point of law. It was entirely open to the Appellant to contend – without concluding an Income Payments Agreement – that there was no jurisdiction in the court to make the order sought by the Respondents. Had he done so, I have no doubt that the Respondents would have made the application, and the outcome would have been whatever it was: it may be that the Appellant would have prevailed. But that is not what happened, because (as I find, based upon the Judge's findings) there was no common assumption between the parties as to the court's jurisdiction. Rather, each made an assessment – a prediction – of the likely outcome were an application to the court to be made, and they concluded the Income Payments Agreement on that basis." (Elston v. King [2020] EWHC 55 (Ch), Marcus Smith J)
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- Later diagnosis of health condition can indicate mistake as to current health
"[111] It is important to note the sequence of events in In re Griffiths. Mr Griffiths had a valuable holding in Iota, a property company (whose shares did not attract business assets relief). He was aged 73 when, in January 2003, he and his wife took advice about tax planning. They received a lengthy report setting out various options. Most involved making potentially exempt transfers, which progressively reduce inheritance tax on qualifying gifts if the donor survives for three years, and avoid tax entirely if the donor survives for seven years after making the gift. The report recommended that seven-year term insurance cover should be obtained. Mr Griffiths decided to take various steps, the most important of which was a settlement of Iota shares worth over £2.6m. This was effected by a two-stage process which was completed in February 2004. He decided not to obtain term insurance. Unfortunately he was diagnosed with lung cancer in October 2004, and died in April 2005. Had he done nothing, the Iota shares would have formed part of his residuary estate, in which his wife took a life interest, and no inheritance tax would have been payable on his death.
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[113] On the rather uncertain foundation of that finding the judge decided that the assignment of 3 February 2004 should be set aside (para 30):
"By that time Mr Griffiths was suffering from lung cancer about which he was unaware. He did therefore make a mistake about his state of health. Had he known in February 2004 that he was suffering from lung cancer he would also have known that his chance of surviving for three years, let alone for seven years, was remote. In those circumstances I am persuaded that he would not have acted as he did by transferring his reversionary interest in the shares to trustees."
The judge did not say whether this was (in the Goff & Jones formulation) an incorrect conscious belief or an incorrect tacit assumption. The editors of that work (para 9-36) treat it as a tacit assumption but it seems close to the residual category of mere causative ignorance. Had the judge not made his hair's breadth finding about the presence of cancer in February 2004 it would have been a case of misprediction, not essentially different from a failure to predict a fatal road accident. Lloyd LJ observed (para 198) that it was strongly arguable that, having declined to follow the financial consultants' recommendation of term insurance, Mr Griffiths was taking the risk of deterioration of his health and failure to survive the statutory period." (Pitt v. Holt [2013] UKSC 26)
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- Expectations as to what would happen in practice in future are misprediction
"[96] That alternative argument must also necessarily fail, because it does not identify anything which qualifies as a causative mistake made at the time of the relevant disposition by Safe Investments UK in 2007. Instead, this argument is based entirely upon the expectations of the Bhaur family in 2007 as to what would happen in practice in the future under the trust structure established as part of the Scheme." (Bhaur v. Equity First Trustees (Nevis) limited [2023] EWCA Civ 534, Snowden, Lewison, Arnold LJJJ)
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Ignorance not sufficient
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- Ignorance not sufficient but can lead to a false belief or assumption
"[112] The case law has provided some guidance on how the court should draw the line between mere inadvertence and ignorance and a relevant causative mistake. In Van der Merwe v. Goldman,[47] Morgan J made clear that the claimants were not just operating under "mere ignorance", because their ignorance had "led them to a false belief or assumption that the creation of the settlement did not involve a chargeable transfer so that no inheritance tax would be payable as a result."" (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J)
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"[36]...(1) There must be a distinct mistake as distinguished from mere ignorance or inadvertence or what unjust enrichment scholars call a "misprediction" relating to some possible future event. On the other hand, forgetfulness, inadvertence or ignorance can lead to a false belief or assumption which the court will recognise as a legally relevant mistake. Accordingly, although mere ignorance, even if causative, is insufficient to found the cause of action, the court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious belief or tacit assumption when there is evidence to support such an inference." (Kennedy v. Kennedy [2014] EWHC 4129 (Ch), Etherton J)
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- Court should not shrink from drawing the inference of tacit assumption
"[108]...It may indeed be difficult to draw the line between mere causative ignorance and a mistaken conscious belief or a mistaken tacit assumption. I would hold that mere ignorance, even if causative, is insufficient, but that the court, in carrying out its task of finding the facts, should not shrink from drawing the inference of conscious belief or tacit assumption when there is evidence to support such an inference. I shall return (paras 131 and 132 below) to the suggestion that this may involve "judicial manipulation." ​(Pitt v. Holt [2013] UKSC 26)
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- Tacit assumption of no adverse tax consequence
"[133] In Pitt the special tax advantage available under section 89 of the Inheritance Tax Act 1984 was a valuable one, and its loss was certainly a serious matter for Mrs Pitt, both as her husband's receiver and on her own account as his wife and carer and as the eventual beneficiary of his estate. Lloyd LJ accepted that (para 215). He was also prepared to accept (para 216) that Mrs Pitt had an incorrect conscious belief, or made an incorrect tacit assumption, that the proposed SNT (which had been the subject of advice from two professional firms, and approved by the Court of Protection) had no adverse tax effects." ​(Pitt v. Holt [2013] UKSC 26)
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"[26] Miss Stanley asked rhetorically what the distinction was between ignorance and a tacit assumption. Ignorance meant that the person simply did not think about the consequences of an action. However, a tacit assumption does not involve a thought process involving a series of steps culminating in the thought, "I believe I will be able to comply with the loan agreement". That would be a conscious belief and there are some things that are simply taken for granted. Melanie's assumption is to be inferred because she proceeded on the basis of legal advice coupled with a belief that her father would not advise her to do something dangerous. Accordingly there was at the least a tacit assumption that entering into the settlement did not involve any impediment to compliance with her agreement to repay the loan.​
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[30] ... In the present case Mr Fraser admittedly gave wrong advice and such advice was seen by Melanie. It is therefore entirely reasonable for her to say, as she does, that based on that advice she broadly understood that there would be no adverse tax consequences for her in entering into the settlement. I do not accept Mr Slater's analysis that "saw" does not equal "read". He did not cross-examine Melanie and on that basis it must follow that her broad understanding was based on a reading of the letter of 6 November 2012." (Freedman v. Freedman [2015] EWHC 1457 (Ch), Proudman J)
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However
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"[29] As for the type of mistake, the claimants' counsel submitted that it was a mistake as to the legal character of the transaction: which she characterised as the effect of the DoA within the framework of the relevant provisions of the IHTA, namely, whether the DoA resulted in an IPDI. I do not accept that submission. If it were correct, then a similar analysis could be applied to every transaction that had unintended tax consequences, by reference to the provisions or case law which categorised the transaction as having those consequences. However, as noted above, this does not of itself prevent the mistake from being of the relevant type.
[30] The mistake was in my judgment one that went to the core of the DoA. The Trust existed solely to cause the property derived from Mr Mallett's estate to fall outside Mrs Alston's estate. Mr Payne's (and the trustees') primary concern was not to disturb that position. Had Ms O'Neil answered Mr Payne's question correctly, the trustees would not have entered into the DoA, or would have waited until after 20 November 2012, when the 2 year period after Mr Mallett's death expired."(Payne v. Tyler [2019] EWHC 2347 (Ch), Master Clark)
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- Not understanding that something would happen construed as mere ignorance
"[92] As regards the advice in the 17th March 2011 letter that the assets of the Trust would be considered to form part of Stefan's estate upon his death: the First Claimant says in his first statement that he was not advised that this would give rise to an IHT charge on Stefan's death. The First Claimant says that he "did not understand that this charge would apply." This negative way of putting the First Claimant's belief, in contrast to a positive "I believed or assumed that this would not give rise to an IHT charge on Stefan's death", would not give rise to a mistake within the rule in Pitt v Holt. It would indicate "mere ignorance" rather than ignorance giving rise to a conscious belief or tacit assumption." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
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- Vague assumption that nothing bad would happen insufficient (agreeing to become trustee and thereby assuming liability for tax)
"[145] [Counsel for the claimant] drew my attention to Freedman v Freedman [2015] EWHC 1457 (Ch), [2015] WTLR 118 (Proudman J) at paragraph 26 as explained in Hartogs v Sequent (Schweiz) AG [2019] EWHC 1915 (Ch) (HH Judge Hodge QC) at paragraphs 21 – 23. He submitted that the Claimant's tacit assumption that her father was not asking her to do anything dangerous was a serious mistake which could trigger the operation of the equitable principle. In my judgment it was undoubtedly a mistake, but in my judgment the tacit assumption was too wide and vague to be a relevant mistake. The submission amounts to saying that the Claimant did not believe that the DORA would have any bad effects. That appears to me to be always going to be the case when a document has unanticipated effects It is not a "distinct" mistake of the kind which is capable of triggering the operation of the equitable principle.
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[154] There must be a line between what is and what is not a sufficiently distinct mistake. In my judgment it is insufficient for an applicant under the equitable principle to have a general conscious belief or to have had a tacit assumption that generally the transaction being entered into would not have any adverse effects. The belief or assumption has to be more distinct and specific than that. The line of cases, including the Freedman case and Pitt v Holt itself where the applicant had a belief that there would be no adverse tax effects or consequences from the transaction is in my judgment very close to the line between what is sufficiently distinct or specific on the one hand and what, on the other, is not. In my judgment the Claimant's belief that her father would not ask her to sign documents that would put her in danger is on the "insufficiently distinct" side of the line. If it was not it is very difficult to see what sort of mistake would not be sufficiently distinct. Accordingly that is a fourth reason why in my judgment the equitable principle does not apply in the circumstances of the present case." (Mackay v. Wesley [2020] EWHC 1215 (Ch), Deputy Master Henderson)
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- Not being aware of potential future tax saving opportunity may be mere ignorance
"[38] The claimant goes on to say that he understands from Linklaters that, by structuring the acquisitions and transfers of the property and the classic cars in the way that he did, he has also created a further tax disadvantage in that, if the property and the classic cars were in his own name, on death he could leave them to his wife when he dies, and they would then be exempt from UK inheritance tax, whereas the assets in the trust are chargeable when he dies, with no exemption if his wife survives him. He therefore says that following Attendus's advice has cost him the opportunity to carry out that straightforward estate-planning. It does not seem to me that that latter point, of itself, would have been enough because that would have been a case of mere ignorance. But, for the reasons I have already given, I am satisfied that the other matters did give rise to a relevant, and operative, mistake and cannot be regarded as mere ignorance." (Hartogs v. Sequent (Schweiz) AG [2019] EWHC 1915 (Ch), HHJ Hodge QC)
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Carelessness and risk taking
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- Not relevant that person was careless unless deliberately ran the risk of being wrong
"[114] Some uncontroversial points can be noted briefly. It does not matter if the mistake is due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he deliberately ran the risk, or must be taken to have run the risk, of being wrong. (There is an illuminating discussion of this point in Lord Hoffmann's speech in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2007] 1 AC 558, paras 24-30). Nor need the mistake be known to (still less induced by) the person or persons taking a benefit under the disposition..." (Pitt v. Holt [2013] UKSC 26)
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"[68] Conceptually, this probably fits best into the third limb of Lord Walker's analytical framework - the conscience test based upon Lindley LJ's dictum in Ogilvie v Littleboy. That appears from Lord Walker's comments in Pitt v Holt on the result in Re Griffiths in relation to the third (2004) settlement which was made at a time when Mr. Griffiths was found to have been under the mistaken belief that he was in good health and was unaware that he had developed lung cancer. At [110] Lord Walker expressly agreed with the observations of Lloyd LJ in the Court of Appeal at [198],
...
[69] On this basis, even if a person is operating under a mistaken belief of fact or law that is relevant to their assessment of the risks of making a gratuitous disposition, they can still be denied relief if they deliberately decide to go ahead and run the risk of being wrong." (Bhaur v. Equity First Trustees (Nevis) limited [2023] EWCA Civ 534, Snowden, Lewison, Arnold LJJJ)
- Mistake not excluded by risk of being ignorant of relevant legislation
"[47] HMRC also submitted that an order for rescission should be withheld because the Claimant and the First Defendant had accepted the risk that their transactions might be caught by taxing provisions of which they were unaware. That risk had come about in this case because they were unaware of the budget announcement of 22 March 2006 and they had not asked anyone to check on 24 or 27 March 2006 whether anything had changed since the earlier advice had been given in November 2005. I do not consider that this is a case where the parties did not make a mistake but instead accepted a risk that a scheme might not have its intended results in the way described by Lord Walker in Pitt v Holt at [114]. The Claimant and the First Defendant made a mistake for the purposes of the principles in Pitt v Holt because, being ignorant of the budget announcement, they wrongly believed that their transactions would not give rise to a charge to tax. In so far as HMRC relied upon the reference by Lord Walker in Pitt v Holt at [135] to a party taking a risk that a tax avoidance scheme would prove ineffective, that comment has no relevance in the present case." ​(Van der Merwe v. Goldman [2016] EWHC 790 (Ch), Morgan J)
​
- Going ahead despite advice being unclear is taking the risk
"[96] As regards the advice in respect of the possibility that there was a gift with reservation, the First Claimant says that the advice "was highly unclear in this regard". The First Claimant quoted the relevant passage of the 17th March 2011 letter in his first statement and then expressed the view that, on re-reading it, it was extremely unclear to him exactly what it stated. The lack of clarity is debateable, but if the advice on a particular point was unclear to the First Claimant, as he says, but he went ahead nevertheless, in my judgment the First Claimant would have been deliberately running a risk or must be taken to have run the risk of being wrong as to that point. If the advice was unclear to him, then in order to avoid a risk as to the point at which the advice was aimed the First Claimant should have sought clarification of the point, rather than going ahead without knowing what the position was.
[97] My conclusion at the end of the immediately foregoing paragraph based on the First Claimant's general complaint about the alleged lack of clarity in the advice given to him is potentially fatal to the Claimants' case based on mistake. Similarly, if and insofar as it was or should have been apparent to the First Claimant that Mr Buzzoni's advice was based on a misunderstanding as to the Claimants' intentions in respect of the property. If and so far as the First Claimant realised that Mr Buzzoni's advice was based on a false assumption as to the Claimants' intentions, the First Claimant would not have been mistaken in relying on that advice, but would have knowingly taken the risk that the advice was incorrect because of its false foundations. However, those potential fatalities to the Claimants case are partly avoided by an examination of the detail of what was advised and what the Claimants consequently thought would be the position under the Trust proposal." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
​
- Not taking the risk where person did not appreciate the effect of advice
​
"[31] I asked Mr Wilson about that email. Mr Wilson's response was that it was clear on the evidence that the claimant had not appreciated that the change in domicile status for inheritance tax would have the effect of subjecting what became the 2014 transaction to an immediate charge to inheritance tax. Rather, the claimant had still made the same mistake about the inheritance tax consequences of the 2014 transaction. Ironically, Mr Wilson submitted, this information made it even more of a mistake. That was because the email had not spelt out, and no one had later spelt out, that there would be an immediate tax charge on the transfer of any assets into the Mercurius Settlement. Mr Wilson said that even if it had been possible for the claimant to have pieced the consequences together, there would still have been a mistake. At its worst, the claimant had been careless, because he did not appreciate the implications of the email of 7 January 2010; but such carelessness was no bar to relief and did not change the position. Again, I accept that submission. In my judgment, the 2010 email does not affect the fact that there was an operative mistake for the purposes of the Pitt v Holt jurisdiction." (Hartogs v. Sequent (Schweiz) AG [2019] EWHC 1915 (Ch), HHJ Hodge QC)
​
- No tax mistake where person deliberately took the risk tax results might not be achieved
"[137] Mr Levack says that he and Mr Rhoden decided to proceed with the Remuneration Trusts immediately after leaving the meeting with Mr Baxendale Walker in early February 2010. That is before they had any opportunity to consider the documents that were provided at the meeting, or the documents that were received later, or to take advice. The failure by Mr Levack to consider the documents provided by Baxendale Walker LLP, or to obtain advice from someone who could interpret them, also demonstrates a cavalier attitude to risk. There is no evidence of any due diligence having been undertaken by Mr Levack. He was prepared to accept Mr Baxendale Walker’s views that were expressed in the course of a meeting without subsequently reading any of the documents that were provided or seeking independent advice. Were it necessary to do so I would conclude that the claimants deliberately ran the risk of the schemes not operating in the way Mr Baxendale Walker’s sales pitch had suggested.
[138] There is, equally, inadequate evidence about the attitude to risk of the board of directors of Dukeries and Riverside. The evidence comes nowhere near to demonstrating that the collective understanding of the respective boards was materially mistaken or what the board’s view was about the risks involved. In the case of Mr Levack himself, his evidence does not meet the requisite threshold.
[139] Furthermore, the schemes are properly characterised as being artificial tax avoidance. Even if there was no actual assumption of risk, it is reasonable in this case, based upon the factors I have summarised above, to conclude that Mr Levack and the companies must be taken to have accepted the risks of the schemes failing." (Dukeries Healthcare Limited v. Bay Trust International Limited [2021] EWHC 2086 (Ch), Deputy Master Marsh)
​
- Entering into evasive scheme and miscalculating the consequence if the scheme went wrong not a mistake
"[217(d)] I accept that Mr Bhaur and the Bhaur Family miscalculated in terms of the consequences to them if the Scheme went "wrong", i.e. if the tax authorities became involved. Their thinking, as I find, was that the Scheme could simply be reversed and that they could opt back into the tax regime that they had sought to evade. The only downside, to their way of thinking, was the fees that they had paid to Aston Court; and that explains why they repeatedly stressed the importance of the fee refund offered by Aston Court and accepted by them. This was undoubtedly wrong, but it was not a mistake. It was a misprediction. The Bhaur Family assumed – and, in the event, were entirely wrong in this assumption – that the downside to them if the Scheme went wrong was containable and confined to the fees paid over. They gave no thought to the point that the transactions they freely entered into were not things writ in water and reversible at will, but proper transfers of their property that could only be reversed if certain conditions were met. That, in my judgment, is not a mistake." (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J)
​​​
On appeal
​
"[81] I can quite see the Judge's view that in deciding to implement the Scheme, Mr. Bhaur was in essence making a prediction or judgment as to whether, if HMRC chose to challenge the Scheme, the adverse consequences could be minimised and contained by the reversal of the transactions and the Fee Guarantee offered by Aston Court.
[82] On the other hand it could, as the Appellants contend, be said that when causing Safe Investments UK to dispose of its shares in Gooch Investment, Mr. Bhaur was not predicting or exercising a judgment as to whether some future event would or would not happen. The Scheme which he was implementing either did, or did not, have the desired effect of avoiding inheritance tax; and Mr. Bhaur's error related to the legal nature and effect of the transactions forming the Scheme, which he wrongly believed were reversible at will, when they were not. Framed in that way, neither matter related to the occurrence of any future event.
[83] I do not, however, think that it is necessary to resolve this interesting point in the instant case. That is because even if the Judge was wrong and this was a case of a mistake rather than a misprediction, for the reasons that follow I would still be of the view that relief should be refused when the remainder of Lord Walker's analytical framework in Pitt v Holt is applied." (Bhaur v. Equity First Trustees (Nevis) limited [2023] EWCA Civ 534, Snowden, Lewison, Arnold LJJJ)
​
- Entering into a tax scheme knowing it might not work is risk taking
"[84] In that regard, the key point is that Mr. Bhaur knew that there was a risk that the Scheme would not work – i.e. that it could be successfully challenged by HMRC. It may well be that, because they were badly advised (or indeed misled) by Aston Court, Mr. Bhaur and his family did not appreciate the full extent of the potential adverse consequences for them if the Scheme did not work. But it is implicit in the Judge's findings in [217(2)(d)] that Mr. Bhaur must at very least have appreciated that there was a risk that the financial consequences of the Scheme failing would not be entirely neutral, and indeed might be worse than the inheritance tax regime that would have applied in the absence of the Scheme. Otherwise there would have been no need for Mr. Bhaur to contemplate reversing the Scheme in order (as the Judge put it) to "opt back" into that previous tax regime. On the Judge's findings, therefore, Mr. Bhaur made a deliberate decision to implement the Scheme, knowing that there was a risk both that it might fail to achieve the desired tax benefits, and that he and his family might, unless they took certain steps to address the position, end up worse off than before.
[85] Accordingly, even if Mr. Bhaur made a relevant mistake as to his ability to reverse the relevant transactions, in my judgment the facts of this case engage the question identified by Lord Walker in Pitt v Holt which I considered in paragraphs 66-69 above. That is whether, applying the Ogilvie v Littleboy approach and depending on a close examination of the facts, it would be unconscionable or unjust for a donee to be permitted to retain the benefit of a gratuitous disposition by a person who has deliberately run the risk that the scheme of which the disposition forms part might not work. I shall return to consider that question after dealing briefly with Grounds 3 and 4." (Bhaur v. Equity First Trustees (Nevis) limited [2023] EWCA Civ 534, Snowden, Lewison, Arnold LJJJ)
​
(2) Mistake must be causative of the transaction
​
- Causative mistake
"[122]... I would provisionally conclude that the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that the test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction." (Pitt v. Holt [2013] UKSC 26)
​
- 'Contributor cause' test may apply where mistake was induced by misrepresentation
"[110] The test for causative mistake in equity was considered in Goff & Jones in the context of restitution. The law of unjust enrichment will relieve a mistake, but the test for causation that is applied depends on whether the mistake was induced or not.[44] The authors have suggested that where an equitable mistake is concerned, a "but for" causation test may be necessary, where the claimant's mistake is spontaneous; but that a looser "contributor cause" test may apply where the mistake was induced by a misrepresentation for which the defendant was responsible.[45] The authors also note that the English authorities on rescission for voluntary dispositions have been predominately concerned with whether a mistake is serious and/or of some sort of quality, rather than being focused on whether any specific causation test is met.[46]
[111] In this case, Mr Anderson, QC, on behalf of the Bhaur Family stressed that it was his clients' case that the mistake had been induced by fraud on the part of a trusted third party – Aston Court. The case law does not appear to consider whether fraud has any particular effect on causation (nor, post Pitt v. Holt, other aspects of mistake), but plainly that must be a relevant factor. It is one that I will be bearing particularly in mind, given Mr Anderson's submissions." (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J)
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(3) Mistake must be sufficiently grave to make it unconscionable to leave the mistaken transaction uncorrected
​
- Some matter of fact or law that was basic to the transaction
"[40] However [HMRC's] submission amounts to a restatement of the rules in Ogilvie v. Littleboy and Pitt v. Holt. When describing the mistake Lord Walker merely says that it has to be "serious", "of sufficient gravity", and it is not helpful to restate it using some other epithet, despite the fact that Lloyd LJ used the word "fundamental" in the Court of Appeal (at [206]) quoted by Lord Walker at [121]. Indeed, Lord Walker disapproved the use of this concept at [115]." (Freedman v. Freedman [2015] EWHC 1457 (Ch), Proudman J)
​
"[36]...(3) The causative mistake must be sufficiently grave as to make it unconscionable on the part of the donee to retain the property. That test will normally be satisfied only when there is a mistake either as to the legal character or nature of a transaction or as to some matter of fact or law which is basic to the transaction. The gravity of the mistake must be assessed by a close examination of the facts, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition.
(4) The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively but with an intense focus on the facts of the particular case. The court must consider in the round the existence of a distinct mistake, its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected." (Kennedy v. Kennedy [2014] EWHC 4129 (Ch), Etherton J)
​
- Close examination of the facts
"[126] The gravity of the mistake must be assessed by a close examination of the facts, whether or not they are tested by cross-examination, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition. Other findings of fact may also have to be made in relation to change of position or other matters relevant to the exercise of the court's discretion...The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an intense focus (in Lord Steyn's well-known phrase in In re S (A Child) [2005] 1 AC 593, para 17) on the facts of the particular case.
...
[128]...The court cannot decide the issue of what is unconscionable by an elaborate set of rules. It must consider in the round the existence of a distinct mistake (as compared with total ignorance or disappointed expectations), its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected. The court may and must form a judgment about the justice of the case." (Pitt v. Holt [2013] UKSC 26)
​​​
- Account taken of indirect tax consequences of mistaken transaction arising from future events
"[44] Put simply, HMRC says that it was Mr Khadem's residence in the UK since March 2020 which caused the tax charge, and not the mistake which I have found above. It is true that had he not so returned, the tax charge would not have arisen.
...
[48] The authorities cited above require that the mistake has a degree of centrality to the transaction in question. In my judgment that degree is shown in the present case. If it were necessary for me to find that the claimant would, but for the mistake, not have entered into the agreement, then based on the evidence of Ms Pettitt, which I accept, I would make such a finding. Whilst the claimant had to start making a distribution before Mr Khadem's 75th birthday in January 2020 under the terms of the plan, it does not follow that such a commencement had to be by way of lump sum. Nor does that follow from her evidence and that of Mr Khadem that they did not consider the risk that he would return to reside in the UK to be a significant one." (JTC Employer Solutions Trustees Limited v. Khadem [2021] EWHC 2929 (Ch), HHJ Jarman QC - It was mistakenly believed that all the pension fund had to be distributed into an escrow account prior to obtaining an effective UAE tax domicile certificate. That was wrong but it would not have caused any UK tax charge if the individual had not later returned to residing in the UK. But for the mistake the pension fund would have been distributed piecemeal)
​
However
​
"[119] All the other alleged mistakes relate to things at one remove from the Claimants and their transfers of money into the Trust. They all relate either to the IHT which would be payable on the Trust Fund on Stefan's death; or to the IHT which would potentially be payable if payments or applications out of the Trust Fund were made to or for the benefit of Stefan's siblings, and Stefan did not survive those payments out or applications by 7 years; or to the reduction of the availability of CGT private residence relief on future sales of the property and possible fragmentation of ownership of the property; all of which would make it more difficult or impossible for the Claimants to achieve one of their goals; that is to make substantial provision for Stefan's siblings.
[120] In my judgment the matters mentioned in the immediately foregoing paragraph do not come within the category of rare cases where the mistake is not as to the nature or legal effect of the transaction itself or as to some matter of fact or law which is basic to the transaction, but is as to its consequences, and yet still within the Pitt v Holt principle.
...
[122] In the present case the persons who will suffer from the consequences of the alleged additional mistakes are not the First Claimant or the Second Claimant who provided the funds for the Trust, but potentially some of the beneficiaries or potential beneficiaries of the Trust who the Claimants had intended to benefit. In my judgment, looked at objectively, as required by Pitt v Holt, those beneficiaries or potential beneficiaries would not be acting unconscionably in relation to the alleged additional mistakes if they said that they would prefer to stick with such rights or interests as the Trust gave them in the settled funds and the property, rather than effectively letting it all go back to the Claimants for them to deal with under an undertaking to the court or, perhaps otherwise as they saw fit." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
​
- Query whether the mistake must have a negative effect on the claimant (e.g. the trustee)
"[37] The first ground relied upon by HMRC is that the mistake (and it is not suggested that one was not made) had no negative effect upon the claimant [the trustee] as the effect of the agreement is that UK tax can be deducted before the balance is paid to Mr Khadem.
...
[39] In response to this first ground, [Counsel for the claimant] submits that there is no such requirement amongst the principles set out in Pitt v Holt. Even if there were, there is a potential breach of trust by entering into the agreement on the basis, because of incorrect advice, that it would not be possible to get the direction if payment was made at a different time. In the case of a professional trustee such as the claimant, a potential action for breach of trust is a serious matter. Moreover, it has potential for significant reputational damage.
[40] Given that the claimant sought, obtained and acted upon professional tax advice, care must be taken not to overstate that potential. However, assuming (but not deciding) for present purposes that there is such a requirement, in my judgment there is no requirement that the negative impact must be financial or that such an impact is narrow in compass. In Lady Hood of Avalon v Mackinnon [1909] 1 Ch 476, the court set aside a gift to two daughters to put them on an equal financial footing on the basis of a mistake by their mother in making the gift by forgetting an earlier gift to one of the daughters. In my judgment the claimant has sufficient interest, on the basis set out above, in seeing the mistake corrected." (JTC Employer Solutions trustees Limited v. Khadem [2021] EWHC 2929 (Ch), HHJ Jarman QC)
​​​
- Serious tax consequences alone may make mistake sufficiently grave
"[61] If I am wrong about this, then I consider that the position is, in any event, sufficiently unclear as to create a risk that the adverse tax consequences identified by the claimants will result. HMRC are not parties to this claim. Even if I were to decide in Lewis' favour that the Appointments did not terminate the relevant interests in possession, HMRC would not be bound by the judgment and would no doubt seek to argue the contrary.
[62] Lewis' counsel submitted that it was not sufficient for rescission that there was only a risk of adverse tax consequences. I disagree. It is clear that the trustees considered themselves to be entering into a "vanilla" transaction as to its tax consequences, not involving themselves in a complex and possibly litigious dispute with the Revenue.
[63] The trustees were therefore mistaken in their belief when entering into the 2013 Appointment either that it had no adverse tax consequences, or, at the very least, that there was no risk of adverse consequences. Either of those mistaken beliefs would in my judgment be sufficiently serious to justify setting aside the 2013 Appointment (and for the reasons stated above, the 2014 Appointment)." (Hopes v. Burton [2022] EWHC 2770 (Ch), Master Clark)
"[59] As a result of the error caused by Credit Suisse, there have been significant tax consequences for the Trust. I am told, and accept, that the tax plus interest plus penalties stands at around £4.6 million for a transfer that was actually, as at March 2005, $16,807,109.86, sterling equivalent of £8.85 million. So, the Transfer has left Dr Abadir in a very significantly financially worse position, and indeed the beneficiaries of the Trust as a class." (Abadir v. Credit Suisse Trust Ltd [2021] EWHC 2573 (Ch), Chief Master Shuman)
​​​​​​
"[61] I consider that the mistake is properly to be characterised as serious. the Claimant understood the Settlement to be tax neutral in that she expected the Property to be liable to Inheritance Tax on her death in the usual way...The actual effect of the mistake was to create an immediate tax liability..." (Suckling v. Furness [2020] EWHC 987 (Ch), Master Kaye)
​
"[155] If, contrary to my judgment, the requirements for the equitable principle were satisfied, then in my judgment, subject to the question of whether rescission is an available remedy in respect of the relief sought, and to questions of delay, ratification and the interests of other parties, in my judgment it would be unconscionable, or unjust, to leave the mistake uncorrected. To my mind it is unconscionable, unjust and unfair that merely through signing a document which she did not conceive would do her harm, the Claimant should become liable for some £1 million to £1.6 million tax and interest." (Mackay v. Wesley [2020] EWHC 1215 (Ch), Deputy Master Henderson)
​
"[31]...First, the amount of tax payable as the result of the mistake, £112,000, is significant in real terms, and particularly as a proportion of the trust fund of which it comprises 40%. Secondly, the effect of the mistake was completely to negate the effect of the DoV, which was an unexceptionable step of tax mitigation. In this respect, this case is analogous to Pitt v Holt - the mistake there deprived the trust in question of the special tax advantage under s.89 IHTA, when it could have complied with s.89 without any artificiality or abuse of statutory relief: [132]- [134]." (Payne v. Tyler [2019] EWHC 2347 (Ch), Master Clark)
"[65] It is clear, as set out above, the mistake as the tax consequence of the transaction can, if sufficiently serious, justify rescission in equity. Here, I accept the claimants' submissions that the identified mistake goes to the heart of the disposition. The trustees were clearly looking for a mechanism which would bring Mrs. Stanley interest in possession to an end in a tax-efficient manner. They only made the appointment in the form they did because they had been told and advised that the appointment would be a potentially exempt transfer and they would thereby avoid an immediate charge to inheritance tax. The mistake was clearly fundamental for the trustees' decision to make an appointment in the form that they did. Moreover, the tax which is now potentially payable is now very large." (Smith v. Stanley [2019] EWHC 2168 (Ch) David Rees QC)
​
"[17] Recent case law has confirmed that there is no reason why a mistake as to tax consequences should be treated any differently from any other kind of mistake which is sufficiently serious to engage the doctrine. At paragraph 27 of her judgment in Freedman v Freeman [2015] EWHC 1457 (Ch), [2015] WTLR 1187, Proudman J said that it was clear from Pitt v Holt, at paragraphs 129 to 132, that a mistake as to the tax consequences of a transaction might, in an appropriate case, be sufficiently serious to warrant rescission. There was said to be no justification for a different approach to mistakes about tax and other types of mistake.
...
[26] The mistake was a sufficiently grave one to make it unconscionable for it to be allowed to stay uncorrected. The tax charges arising from the 2009 transaction are addressed at paragraphs 62 to 65 of the claimant's witness statement. They approach some £1.7 million and will therefore be substantial; and they will have to be borne by the claimant as a UK domiciled settlor. Moreover, it was a causative mistake. As paragraph 71 of the claimant's witness statement makes clear, had he known of the potential charges to tax, he would not have transferred the shares in the second defendant into the Milky Way Settlement Trust, nor would he have purchased the St John's Wood property through such a structure. The authorities are consistent in showing that a causative mistake of this nature satisfies the gravity test.
[27] In these circumstances, I accept that it would plainly be unconscionable for the claimant to be left to bear the substantial immediate tax charges in respect of the 2009 transaction. The claimant has become liable to the charge merely by following advice that he was given, on the basis of an incorrect analysis, and in a mistake belief as to the outcome of doing so. I am satisfied that this is precisely the type of situation where unconscionability (which in this context is synonymous with injustice or inequity) should be found by the court. I therefore accept that it is appropriate for the court to set aside the 2009 transaction. I accept Mr Wilson's submission that this is a paradigm case for the invocation of the Pitt v Holt jurisdiction. Without such relief, the initial 20 per cent charge will have to be borne by the claimant himself, as the donor of the relevant assets into the settlement." (Hartogs v. Sequent (Schweiz) AG [2019] EWHC 1915 (Ch), HHJ Hodge QC)
​​
However
​
"[116] The fact that significant and unexpected tax liabilities have arisen from transactions has been taken into consideration by courts in concluding that a claimant had made a sufficiently grave mistake of so serious a character as to render it unjust not to grant a remedy. In Lobler v. HMRC,[52] the Upper Tribunal considered the tax implications of the transactions to be "devastating", particularly because they had effectively led to the claimant's bankruptcy, and as such his mistake was of a sufficiently serious nature as to warrant relief. Similarly, in Van der Merwe v. Goldman,[53] Morgan J found that the amount of tax and interest payable made the mistake sufficiently grave, and that it was of so serious a character as to render it unjust for any beneficiaries to resist rescission.[117] However, a large tax liability on its own will not generally be sufficient for the court to determine that the mistake is sufficiently serious so as to require a remedy. In Freedman v. Freedman,[54] Proudman J suggested that if the only consequence of the mistake made by the claimant had been the payment of inheritance tax, this may not have been sufficiently serious. However, on the facts, it was clear that the purpose of the transactions had been to protect the properties that were in the claimant's name, while also facilitating the repayment of a loan to the claimant's father. The extent of the inheritance tax liability was such that the claimant would not be able to repay the loan, and as such, it was a sufficiently serious mistake." (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J)
​
- Having to pay rent to occupy a trust property intended to be home
"[116] In my judgment those mistakes were sufficiently grave as to make it unconscionable, absent a relevant change of circumstances, for the recipient (the Trustees and the beneficiaries and potential beneficiaries of the Trust) to retain the gift of the £4.1 million. The mistake had a very serious impact on the Claimants. It is only necessary in that regard to contrast very briefly the situation they thought they were creating, with that which eventuated to see the grave nature of the mistakes. The Claimants thought they were acquiring the property through the Trust and would be able to use it themselves, though possibly paying a rent by reference to the days when they were physically present at the property. In the event, in order to be able to use the property and avoid the GWROB rules they had to take a lease of the property from the Trustees at a rent of £102,000, subject to a 20% discount for the period down to 30th November 2016 and to future review. This rent is taxable at 45% in the hands of the trustees." ​(Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
​
- Change of circumstances may affect conscionability of setting aside transaction
"[117] If the question of setting aside the initial transfer of £4.1 million had arisen immediately after the acquisition of the property, there would have been no relevant change of circumstances and nothing except possibly the costs and expenses of purchase, in respect of which counter-restitution might be required. The transfer of the £4.1 million could have been set aside; the £4.1 million less the costs of purchase and associated administrative costs and expenses of the Trust, could have been traced into the property and the property could have been ordered to be transferred to the First Claimant. There would have been no material change of position or expenditure on the property by the trustees or their beneficiaries or potential beneficiaries and no third party rights would have arisen. Whether there has been a change of circumstances or expenditure which impacts on the conscionability of setting aside the initial transfer of £4.1 million or whether any and if so what counter-restitution should be ordered requires some examination of what was done after the initial transfer and purchase." ​(Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
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Examples
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- Unexpected IHT liability on setting up a trust
"[53]...In 1990 he had suffered very serious head injuries in a road traffic accident, resulting in his mental incapacity. His wife, Mrs Patricia Pitt, was appointed as his receiver under the Mental Health Act 1983, and on his death she became one of his personal representatives, and the only beneficiary interested in his estate. Mr Pitt's claim for damages for his injuries was compromised by a structured settlement, approved by the court, in the sum of £1.2m. Mrs Pitt's solicitors sought advice from Frenkel Topping, a firm of financial advisers said to have specialist experience of structured settlements. They advised that the damages should be settled in a discretionary settlement, and this was done, with the authority of the Court of Protection, in 1994. The trust was referred to as the Derek Pitt Special Needs Trust ("the SNT").
[54] Frenkel Topping gave their advice in a written report to Mrs Pitt (as receiver) which was made available to the Official Solicitor, who represented her husband in the application to the Court of Protection. The report referred to various advantages which the SNT was expected to secure, and it mentioned income tax and capital gains tax in its illustrative forecasts. But the report made no reference whatsoever to inheritance tax. The SNT could have been established without any immediate inheritance tax liability if (i) it had been an interest in possession trust or (ii) it had been a discretionary trust complying with section 89 of the Inheritance Tax Act 1984. In order to comply with section 89 its terms should have provided that at least half of the settled property applied during Mr Pitt's lifetime was applied for his benefit. But the SNT as drafted and executed contained no such restriction. The consequence was an immediate liability to inheritance tax of the order of £100,000, with the prospect of a further tax charge on the tenth anniversary in 2004. The deputy judge (Mr Robert Englehart QC) observed that by 2010 the total tax, together with interest and penalties (if exacted) must have amounted to between £200,000 and £300,000.
...
[142] In my opinion the test for setting aside a voluntary disposition on the ground of mistake is that set out in para 126 above, and it is satisfied in Pitt v Holt. There would have been nothing artificial or abusive about Mrs Pitt establishing the SNT so as to obtain protection under section 89 of the Inheritance Tax Act 1984. There was a considerable delay in the commencement of the proceedings, but the Revenue do not rely on the delay. They do rely on rescission being pointless and therefore inappropriate, but I would reject that submission for the reasons set out above. The deputy judge found ([2010] 1 WLR 1199, para 15) that the setting aside of the settlement would have no effect on any third party (plainly he was not here treating the Revenue as a third party). I would discharge the orders below and set aside the SNT on the ground of mistake." (Pitt v. Holt [2013] UKSC 26)
​​
"[45] HMRC also submitted that it was not unconscionable for the beneficiaries under the settlement to resist rescission of the settlement. It did not seem to be disputed that it would be unconscionable for the children and remoter issue to resist rescission in circumstances where the Claimant would bear a heavy tax liability as the result of a mistake. What was said was that if one confined oneself to the transactions on 27 March 2006 which conferred a benefit on the First Defendant amongst others, it would not be unconscionable for the First Defendant to resist rescission. This was on the basis that the effect of rescission of those transactions would leave the First Defendant in a situation where she had no beneficial interest in the property having made a gift of it on 24 March 2006. On my analysis of the facts, that would not be the effect of rescission of the transactions of 27 March 2006. In any event, I consider that the more realistic way of approaching this case is to consider it as an application by the Claimant and the First Defendant together to set aside the transactions of 24 and 27 March 2006 in which case the only beneficiaries whose conscience needs to be considered are the children and remoter issue." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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- Failure to realise settlor had become UK domiciled leading to IHT charge
"[25]...The unexpected tax charge arose because those advising the claimant had failed to appreciate that he was no longer a non-domicile for UK inheritance tax purposes. The claimant was advised that the planning he was seeking to carry out was standard estate planning for someone who was resident, but not domiciled, in the UK. It would have been perfectly appropriate for someone of that status; but, unfortunately, he had become domiciled in the UK on or about 6 April 2008, at the beginning of the tax year following 16 years of being a tax resident in the UK. That was something that the claimant had only discovered when he received advice to that effect from Linklaters in November 2016.
...
[27] In these circumstances, I accept that it would plainly be unconscionable for the claimant to be left to bear the substantial immediate tax charges in respect of the 2009 transaction. The claimant has become liable to the charge merely by following advice that he was given, on the basis of an incorrect analysis, and in a mistake belief as to the outcome of doing so. I am satisfied that this is precisely the type of situation where unconscionability (which in this context is synonymous with injustice or inequity) should be found by the court. I therefore accept that it is appropriate for the court to set aside the 2009 transaction. I accept Mr Wilson's submission that this is a paradigm case for the invocation of the Pitt v Holt jurisdiction. Without such relief, the initial 20 per cent charge will have to be borne by the claimant himself, as the donor of the relevant assets into the settlement." (Hartogs v. Sequent (Schweiz) AG [2019] EWHC 1915 (Ch), HHJ Hodge QC)
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- Fundamental feature of appointment by trustees that it should not include shares to avoid CGT charge
"[20] Mr Kennedy executed the October 2008 Appointment in the mistaken belief that it gave effect to his intention, which he had discussed and agreed with KPMG earlier in the year, that the relevant shares would remain in the Settlement in order to avoid any charge on them to CGT for the foreseeable future. Contrary to the instructions which he had given to KPMG in April 2008, the apparent effect of clause 2(1)(c) was to appoint to him (in addition to a substantial cash sum) the relevant shares.
...
[38] The mistakes made by the three trustees were causative and very serious. It was a fundamental feature of the TSI planning, as instructed by Mr Kennedy and understood by his professional advisers, that the October 2008 Appointment should not give rise to a charge to CGT. Had the trustees not been mistaken they would not have executed the October 2008 Appointment with the terms it contained. In particular, they would not have executed it with clause 2.1(c) included. The effect of the inclusion of clause 2.1(c) was to deprive the other beneficiaries of the Settlement, namely (subject to any future appointment) Mr and Mrs Kennedy's children, of the relevant assets and to diminish the value of the remaining assets in the Settlement by the amount of the substantial charge to CGT payable by the trustees of the Settlement. The seriousness of those consequences is not significantly diminished by the fact that, for various practical reasons, the trustees executed an appointment on 10 January 2012 of the Latium shares in favour of Mr Kennedy on condition that they had not already been appointed to him." (Kennedy v. Kennedy [2014] EWHC 4129 (Ch), Etherton J)
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- Appointment by trustees made in mistaken belief that it would be exempt for IHT purposes set aside
"[64] Having regard to the evidence in this case, I am entirely satisfied that the trustees in making the 2015 appointment acted in reliance upon and on the basis of the advice of Ms. Highet, that the appointment would be an exempt transfer by Mrs. Stanley for inheritance tax purposes. I accept the trustees' evidence that had they appreciated that this was not the case, they would not have executed the appointment in the form that they did but would have looked for some other mechanism under which funds could be appointed or advance to discretionary beneficiaries without an immediate challenge to inheritance tax being incurred.
...
[68] In my judgment, the mistake here was of so serious a character as to render it unjust on the part of those beneficiaries who have received payment subsequent to the 2015 appointments to resist rescission and, indeed, as I have said none of them sought to do so." (Smith v. Stanley [2019] EWHC 2168 (Ch) David Rees QC)
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- Deed of appointment of life interest mistakenly giving rise to potential IHT liability (due to being in recipient's estate)
"[16] The claimants have accepted in their correspondence with HMRC that, as a consequence of s.144 IHTA, the property subject to the DoA was, for inheritance tax purposes, treated as if the life interest for the Deceased had arisen under the Will. It is therefore treated as an IPDI, so that the property subject to the life interest is treated as forming part of the estate of Mrs Alston.
[17] If, therefore, the DoA remains in place, the estate of the Deceased is likely to be subject to additional inheritance tax of £112,000.
...
[30] The mistake was in my judgment one that went to the core of the DoA. The Trust existed solely to cause the property derived from Mr Mallett's estate to fall outside Mrs Alston's estate. Mr Payne's (and the trustees') primary concern was not to disturb that position. Had Ms O'Neil answered Mr Payne's question correctly, the trustees would not have entered into the DoA, or would have waited until after 20 November 2012, when the 2 year period after Mr Mallett's death expired.
[31] I also consider that the mistake is properly characterised as serious for two reasons. First, the amount of tax payable as the result of the mistake, £112,000, is significant in real terms, and particularly as a proportion of the trust fund of which it comprises 40%. Secondly, the effect of the mistake was completely to negate the effect of the DoV, which was an unexceptionable step of tax mitigation. In this respect, this case is analogous to Pitt v Holt - the mistake there deprived the trust in question of the special tax advantage under s.89 IHTA, when it could have complied with s.89 without any artificiality or abuse of statutory relief: [132]- [134]." (Payne v. Tyler [2019] EWHC 2347 (Ch), Master Clark)
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- Settlement intended to protect asset giving rise to IHT charge that would prevent a loan being repaid
"[41] In each case, the issue is whether or not the mistake is sufficiently serious. A mistake about the effect of a transaction can meet that test, and although it is true that a matter of fact or law basic to the transaction is required in most cases, it is strongly arguable in any event that the test is met in the present case since the tax consequences have the effect that the loan from Melanie's father cannot be repaid. I suspect that (although "consequences (including tax consequences) are relevant to the gravity of the mistake, whether or not they are (in Lloyd LJ's phrase) basic to the transaction": see Pitt v. Holt at [132]) if the consequence were only that inheritance tax were payable, I would have more sympathy with Mr Slater's submissions. However, the fact that the tax charge means that the loan cannot be repaid makes all the difference. The settlement was so affected by the tax consequences that its effect was entirely different from that which Melanie believed it to be. It seems to me that this element fulfils Lord Walker's analysis at [126],
"The gravity of the mistake must be assessed by a close examination of the facts, whether or not they are tested by cross-examination, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition. Other findings of fact may also have to be made in relation to change of position or other matters relevant to the exercise of the court's discretion."
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[51] The position is that Melanie has made a distinct and serious mistake. The settlement was not created for the benefit of the beneficiaries but to protect Melanie. She now has a large tax liability which affects her ability to repay the loan which she took on the basis that it would be repaid. Taking the matter in the round, it would be unconscionable for the donees to profit from that mistake and insist on their rights under the settlement." (Freedman v. Freedman [2015] EWHC 1457 (Ch), Proudman J)
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- Mistake re double tax relief leading to distribution in lump sum and subsequent large tax charge on recipient
"[52] [Counsel for the claimant] submits that is unconscionable to leave the mistake uncorrected having regard to a number of factors. First, the size of the tax charge. Even if the difference between the tax charges under the agreement and upon setting that aside is limited to interest payable on the underlying tax, this will be significant. Second, the claimant lost the opportunity to pay Mr Khadem in tranches, some of which might have been paid while he was not UK resident, or might still be so paid in the future. Third, leaving the mistake uncorrected leaves the claimant potentially open to action for breach of trust with both the financial and reputational consequences that such an action may have.
[53] In my judgement these factors are such as to make it unconscionable for the mistake to remain uncorrected. It may be that the difference will be limited to interest on the underlying tax. That in itself would be significant. However, there is a realistic possibility that the difference will be significantly more than that, depending on Mr Khadem's circumstances. Setting aside the agreement will not lead to his avoiding paying any UK tax which is due from him on payments from the plan made to him whilst he is resident in the UK.
[54] As for risk, I accept on the basis of the written evidence before me that in the circumstances obtaining at the time of the agreement, neither the claimant or Mr Khadem considered the risk of his returning to live in the UK to be at all significant and the circumstances in which he did so were not then foreseeable.
[55] Another aspect of unconscionably is the possible cause of action which Mr Khadem may have against the claimant and/or which the claimant may have against RSM if the mistake remains uncorrected. [Counsel for the claimant] pointed to Lord Walker's distinction between direct and indirect remedy in paragraph 41 of Pitt v Holt. She submits that only limited weight should be attached to this factor, and given the uncertainties of seeking such an indirect remedy I accept that submission." (JTC Employer Solutions trustees Limited v. Khadem [2021] EWHC 2929 (Ch), HHJ Jarman QC)
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- No causative mistake where claimant was party to evasive remuneration trust scheme and aware that things were being done to dupe HMRC
[217(2)] The critical question, I consider, is that articulated in paragraphs 92(3), 131 and 210 above. In documentation that the Bhaur Family saw and considers, Aston Court made various statements as to the nature of the Scheme that Aston Court were inviting the Bhaur Family to subscribe to. Those statements – which I have set out in Section F(3) above – cannot be explained away by Mr Anderson's contention that Aston Court were "papering the file" for deployment in precisely this case and in order to dupe the Bhaur Family. The point is unsustainable because these communications were made to the Bhaur Family, and considered by them. It seems to me that whilst these statements (and the other transactional documents) were undoubtedly "window dressing", this was "window dressing" done in order to dupe HMRC and with the Bhaur Family's tacit assent. With great regret, and taking fully into account Aston Court's dishonesty, that is my conclusion on this critical point.
...
[217(2)(c)(ii)] In later communications, the Bhaur Family was told in terms that the trust would be a remuneration trust,[102] "for the benefit of current, past and present employees". Whilst I fully appreciate, and accept, that Mr Bhaur had no idea about the tax law I have sought to summarise in paragraphs 137 to 140 above, the fact is that he (Mr Bhaur) was told, in terms, who the beneficiaries of the trust would be. Those beneficiaries obviously did not align with Mr Bhaur's intended beneficiaries of his (and his wife's) money. The mismatch between what Mr Bhaur was told and what he wanted to do is palpable. None of Mr Bhaur, Mandeep or Baldeep could explain this mismatch, save through a reference to "trust" in Aston Court. But that is, I am afraid, no explanation. Either the Bhaur Family trusted Aston Court to set up a scheme legitimately in accordance with their needs – in which case these errors were obvious and had to be corrected. Or the trust of the Bhaur Family was that Aston Court would set up a Scheme that said one thing, but did another. Whilst I have no doubt that – even at the time – Mr Bhaur, Mandeep and Baldeep would have reacted with dismay and denial to the suggestion that they were participating – albeit perhaps as silent partners – in an evasive and illegitimate scheme, that is, I find, precisely what they did. Their dishonesty or otherwise is not something I need consider: what is important for the purposes of this case is that they were not mistaken in the essential tax evasiveness of the Scheme. The Scheme was an employee remuneration trust in form only, and the Bhaur Family knew and endorsed this approach..." (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J)
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Assets left in staff remuneration trust
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"[217(f)] I do take account of the fact that the decision that the Bhaur Family made in 2007 is one that has had – and will continue to have – devastating consequences. But this is not a case of a minor decision – ill-considered and quickly made – and so, perhaps, more easily to be regarded as a mistake. Entry into the Scheme was understood by the Bhaur Family to be a decision of considerable moment at the time it was made. That much is clear from the volume of transactional documents seen and executed by the Bhaur Family and the amount of Aston Court's fees. The Bhaur Family knew that this was a significant step and – whilst I know the consequences of their decision were and are enormous – they do not arise out of a mistake.
...
[219] For all these reasons, I conclude that there was no mistake on the part of the Claimants and that the Scheme cannot, whether in whole or in part, be set aside on the grounds of mistake. Accordingly, I am minded to make the following orders and declarations, namely that:
(1) The Estate is held on the terms of the Second Staff Remuneration Trust described in paragraphs 41 to 42 above. The Estate is held by Stratton 17, with Equity First as trustee. Equity First is the Protector and there appears to be no Enforcer that I can identify. The Bhaur Family and the Protector are Appointed Enquirers." (Bhaur v. Equity First trustees (Nevis) Limited [2021] EWHC 2581 (Ch), Marcus Smith J, query why, if the trust was a sham, it was upheld)
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- Mistake as to CGT on transfer to trust
"[3] The original claim arose in this way. The Claimants, who were father and son, farmed together in partnership. They were, or may have been, concerned about a number of matters, including possible claims from the other children of the father on his death, and a possible claim from the son's wife on divorce. They say that their then solicitors advised them to create a discretionary trust of the land, and that they also advised that there would be no capital gains tax chargeable on the transfer of the partnership land into that trust. The solicitors were and are not party to the claim, and they have not been heard, either in the original or the amended claim. But certainly in correspondence they denied both giving the advice and liability at all.
[4] The trust was created, with the Second Claimant, his son (the Defendant) and a partner in the firm of solicitors as the original trustees. The transfers of the partnership land to the trustees took place on 24 June 2011. Unfortunately for all concerned, capital gains tax was exigible on the transfers: more than £200,000, plus interest and possible penalties. The effect on the Claimants was described as "crushing".
...
[7] At the end of the hearing I gave an extempore judgment, stating that I was satisfied on the evidence before me that there had been a distinct mistake, not just ignorance, made by both Claimants (that is, as to whether capital gains tax would be payable on the transfer), that the mistake was basic to the transaction, that the Claimants did not deliberately run the risk of being wrong, and that it would be unconscionable or unjust to leave it uncorrected. I was also satisfied that there were no effective bars to rescission. It was not for example a bar that the mistake concerned the effect of taxation, or that there would or might be a fiscal effect of any order made." (Bainbridge v. Bainbridge [2016] EWHC 898 (Ch), Master Matthews)
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- Misunderstanding between clients and tax adviser as to use of trust property leading to mistaken tax advice
"[90]...On the evidence and material before me there is ample scope for finding that neither the Claimants nor Mr Buzzoni or Mr Marsh are substantially incorrect in what they say, but that there was a misunderstanding between them as to the nature of the Claimants' intentions in respect of the property. I so find. I accept the Claimants' evidence as to their intentions in respect of the property. It is corroborated by the nature and cost of the property itself and that of the property near Petersfield considered earlier. A property of the size and value of Medstead Grange, with or without alterations, would have been unsuitable for use as a home for Stefan alone. The First Claimant says so in his supplemental statement...
...
[113] It follows that in my judgment, at the time of the creation of the Trust, the payment into the Trust of the first 4.1 million by the First Claimant and the purchase of the property, the Claimants were mistaken in the two respects I have adverted to:
113.1. In thinking that otherwise than for the purpose of minimising the GWROB rules, they would not have to pay for their occupation of the property.
113.2. In thinking that they could have minimised the risk of the GWROB rules applying by paying for their enjoyment of the property only in respect of the periods when they were present at the property otherwise that in their roles as Stefan's carers.
[114] In my judgment those were distinct mistakes or tacit assumptions as distinguished from mere ignorance or inadvertence." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
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- Settlor's mistake as to availability of trust income to benefit wife sufficiently grave
"[21] I am satisfied that Mr Wright made a grave mistake when he constituted the settlement. He believed that, notwithstanding the establishment of the settlement, the income from the settlement would be available for application or appointment to Mrs Wright so that they would not lose the income from the settled assets on which they currently relied to maintain their standard of living. I am satisfied that Mrs Wright made a grave mistake when she contributed £301,606 to the settlement directly, thereby depriving herself for all time from the income from that money on which she and her husband relied pending the drawing of Mr Wright's pension when he attained the age of 70. It is recognised by their children and by those representing grandchildren, future spouses and unborns that it would be unfair to insist that notwithstanding that mistake the £325,000 which has been settled should remain in settlement.
[22] I agree that it would be unconscionable. This was in my judgment an explicit and apparent mistake as to the nature of the transaction and its effects into which Mr Wright and Mrs Wright were being invited by the bank to enter. The mistake has serious consequences for Mr and Mrs Wright. I am satisfied that I ought to rescind the discretionary trust established on 13 August 2012. The question then is: what are the consequences?" (Wright v. National Westminister Bank [2014] EWHC 3158 (Ch), Norris J)
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Possible exclusion for artificial tax avoidance
"[132] I would therefore reject the first new point as much too wide, and unsupported by principle or authority. But it is still necessary to consider whether there are some types of mistake about tax which should not attract relief. Tax mitigation or tax avoidance was the motive behind almost all of the Hastings-Bass cases that were concerned with family trusts (as opposed to pensions trusts). In Gibbon v Mitchell there was a mistake as to the legal effect of the transaction, which was to plunge the family into the trap of forfeiture under the protective trusts, rather than to achieve the immediate acceleration of the adult children's interests. But the seriousness of the consequences of the mistake was greatly enhanced by the inheritance tax implications. On the test proposed above, consequences (including tax consequences) are relevant to the gravity of a mistake, whether or not they are (in Lloyd LJ's phrase) basic to the transaction.
...
[135] ... In some cases of artificial tax avoidance the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy. Since the seminal decision of the House of Lords in WT Ramsay Ltd v IRC [1982] AC 300 there has been an increasingly strong and general recognition that artificial tax avoidance is a social evil which puts an unfair burden on the shoulders of those who do not adopt such measures. But it is unnecessary to consider that further on these appeals." (Pitt v. Holt [2013] UKSC 26)
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- Appointment by trustees perfectly legitimate way of conferring benefit in tax efficient manner
"[39] Lord Walker observed in Pitt v Holt at paragraph [135] that in some cases of artificial tax avoidance the court might think it right to refuse relief, either on the ground that such claimants, acting on supposedly expert advice, must be taken to have accepted the risk that the scheme would prove ineffective or on the ground that discretionary relief should be refused on grounds of public policy. The October 2008 Appointment was not an artificial tax avoidance arrangement or part of one. It was executed as a perfectly legitimate way of conferring benefit on Mr and Mrs Kennedy's children and grandchildren in a tax efficient manner that was contemplated by express provisions in FA 2006." (Kennedy v. Kennedy [2014] EWHC 4129 (Ch), Etherton J)
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"[69] This is not a case where there has been an element of artificial tax avoidance so as to require the court to withhold relief on the grounds of public policy. I accept the claimants' submissions that these were, essentially, straightforward trust transactions and in this context, I note the attitude that was taken by HMRC in the Van der Merwe case that I have already referred to." (Smith v. Stanley [2019] EWHC 2168 (Ch) David Rees QC)
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- Settling a trust not of itself within the scope of public policy reason to refuse
​
"[42] The parties' skeleton arguments in advance of the trial addressed the question whether this was a case of artificial tax avoidance where the court ought to withhold relief on the ground of public policy, a possibility which was mentioned by Lord Walker in Pitt v Holt [2013] 2 AC 108 at [135]. The parties' arguments were of considerable interest but in the course of closing submissions, HMRC accepted that it was unrealistic for them to ask a judge at first instance to give effect to Lord Walker's suggested possibility on the facts of this case. HMRC accepted that at this level of decision, in the light of recent decisions of the Supreme Court on the principle of ex turpi causa and public policy, in particular, the decision in Le Laboratoires Servier v Apotex Inc [2015] AC 430, the court could not be expected to withhold relief on this ground in this case. Having considered the arguments in the skeleton arguments, I can say that I do not think it appropriate for me to hold, on my own initiative, that it would be contrary to public policy to grant relief in this case." (Van der Merwe v. Goldman [2016] EWHC 790 (C), Morgan J)
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- Wholly artificial trust set up purely for tax avoidance reasons leading to refusal of any relief
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"[102] It also seems to me to be of considerable weight that the Scheme was, on any objective view of the facts, an entirely artificial tax avoidance scheme.
[103] As the Appellants had themselves pleaded (affirmed by a statement of truth from Mr. Bhaur) and the evidence made crystal clear, (see paragraphs 25, 28, 32 and 37-39 above), Safe Investments UK had no need whatever to set up a trust to incentivise or reward any employees, still less one of the size of the Estate that was transferred to the First Staff Remuneration Trust. At the outset the newly formed company had only three employees, who were all members of the Bhaur family and who were not intended to benefit under the trust. The company also had no business reason to employ any persons after the First Staff Remuneration Trust was established, and only did so because Aston Court advised that it would be preferable for the company to employ some non-family members for the purposes of the Scheme. But even then, Mr. and Mrs. Bhaur had no intention whatever that those non-family members should benefit in any way from the trust.
[104] It is, in the circumstances, difficult to imagine a more artificial construct than the First Staff Remuneration Trust established under the Scheme. The pleadings and evidence to which I have referred make clear that the trust had no independent business or commercial purpose and that it was brought into existence, and the Estate transferred to it via the transfer of the shares in Gooch Investment, purely and simply for the purposes of tax avoidance.
[105] I fully accept that tax avoidance is not unlawful, but I agree with Lord Walker's observations in Pitt v Holt at [135] that artificial tax avoidance is a social evil that puts an unfair burden on the shoulders of those who do not adopt such measures. In my view this is a very weighty factor against the grant of any relief.
[106] Taken together, I am firmly of the view that even on the basis that the Appellants were not complicit in the dishonesty of Aston Court, it would not be unjust or unconscionable to refuse equitable relief and to leave the consequences of the Appellants' mistaken belief uncorrected." (Bhaur v. Equity First Trustees (Nevis) limited [2023] EWCA Civ 534, Snowden, Lewison, Arnold LJJJ)​​
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Effect
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- Voidable not void
"[41] The first head of relief claimed in the amended Particulars of Claim is a declaration that the relevant shares "were not appointed upon the trusts of the October [2008] Appointment". Insofar as the wording of this head of relief assumes that the mistakes made by the trustees had the consequence that the transfer of the relevant shares to Mr Kennedy was void, it is plainly misconceived. A Pitt v Holt mistake makes the voluntary disposition voidable in equity not void at law." (Pitt v. Holt [2013] UKSC 26)
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- Voided transaction treated as having not occurred
"[130] In my opinion that submission begs the question, since if a transaction is set aside the Court is in effect deciding that a transaction of the specified description is not to be treated as having occurred. In the case of inheritance tax, this is expressly provided by section 150 of the Inheritance Tax Act 1984. That section is expressed in general terms as applying where a transfer "has by virtue of any enactment or rule of law been set aside as voidable or otherwise defeasible", and the effect is that tax which would not have been paid or payable "if the relevant transfer had been void ab initio" is to be repaid, or cease to be payable. There is no exception in section 150 for avoidance on the ground of a mistake about tax..." (Pitt v. Holt [2013] UKSC 26)
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- Trace property interests into replacement assets
"[32] It is clear from the evidence that the claimant has transferred a mixture of cash and assets into the two settlements. Where cash has been provided by the claimant, it has been used to purchase assets and to incur expenditure on them. I accept that that is no bar to rescission because the traceable proceeds can still be recovered. The parties anticipate that the issue can be resolved by agreement between the parties if the court grants rescission; but, if necessary, there can be appropriate accounts and inquiries." (Hartogs v. Sequent (Schweiz) AG [2019] EWHC 1915 (Ch), HHJ Hodge QC)
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"[30] Of course, it is true that the line of authorities discussed by Rimer J is concerned with rescission for misrepresentation (often fraudulent), whereas the present case is concerned instead with a mistake sufficient to justify rescission. But I do not think that this difference matters. The consequence of the rescission is the same whether it takes place because of fraudulent (or negligent) misrepresentation, or because of causative and basic unilateral mistake. The property transferred under such a mistake revests beneficially in the transferor, subject to third party rights. In a case where third party rights cannot be disturbed, there is no reason not to apply the tracing process to exchange products of the transferred property in order to find other assets to which to make a claim instead.
...
[32] In my judgment this shows that it is not only in cases of fraudulent misrepresentation that the idea of 'proprietary base by avoidance' and the tracing process can be prayed in aid. The principle is wide enough to cover other vitiating factors too. In my judgment it extends to cases of mistake, and it is therefore open to the Claimants in the present case to make a claim to the new land.
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[34] ... In principle the original owners of Harker Hill and Fox Covert, neither being at fault, are entitled to share the beneficial ownership of the new land in proportion to the value that each of Harker Hill and Fox Covert bore to the total value of both parcels of land at the date when they were sold out of the trust and turned into proceeds of sale. As I have already said, there can be no tracing into the payment of stamp duty, legal costs and partnership liabilities." (Bainbridge v. Bainbridge [2016] EWHC 898 (Ch), Master Matthews)
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- Impute steps taken later that cannot be reversed to original owners
"[42] It seems to me, therefore, that the right way to analyse what must be considered in the present case as having occurred, once the transfers into trust are treated as never having happened, is that the original owners have retained Harker Hill and Fox Covert, but that the sales (actually by the trustees) are to be imputed to those original owners, as also is the use of the proceeds (in part) to invest in the new land, and (in part) to pay stamp duty, costs and other liabilities of the business." (Bainbridge v. Bainbridge [2016] EWHC 898 (Ch), Master Matthews)
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- Possible for tax legislation to apply to purported transactions, even if set aside, but needs to be clear
"[37] The second point to consider is the effect of the rescission. As I have already said, the effect of an equitable rescission for mistake is to undo the transaction from the beginning. It is thereafter treated for the purposes of the general law as if it never took place: see AC v DC [2012] EWHC 2032, [30]. Whether it has the same effect for the purposes of tax law must however depend on the true construction of the tax law in question.
This is because it is competent for Parliament to legislate so as to impose a tax burden not only if a certain act is done or an event takes place, but also if such an act is purportedly done or an act appears to take place, but thereafter the Court says that it did not because of a vitiating factor. This latter approach would obviously be rare, and would no doubt have to be the subject of express wording or at least necessary implication in the relevant legislation. The ordinary or default position would be that the tax (whatever it was) should be exigible only where the act or event is ultimately held to be valid and effective under the general law. So under the default position, if the act or event is ultimately held not to be valid and effective under the general law, it is also not treated as a taxable event either: AC v DC [2012] EWHC 2032, [31]-[41].
Here I am not aware of any special legislation. I must therefore assume that the default position applies. If that is so, then, for example, income received between the date of the transfer and the date of a revesting by virtue of rescission in the original owner should belong to the original owner and not to the purported (but now divested) owner. This is what was held to have occurred in Wright v National Westminster Bank [2014] EWHC 3158 (Ch), [25]." (Bainbridge v. Bainbridge [2016] EWHC 898 (Ch), Master Matthews)
- Partial rescission of a voluntary transaction
"[21] A further point is that rescission has usually been seen as an all or nothing remedy: see eg TSB v Camfield [1995] 1 WLR 430, CA. But the remedy awarded is fact sensitive, and permits what is practically just, as for example the cases of O'Sullivan v Management Agency and Music Ltd [1985] QB 428, 466-467, CA, and Cheese v Thomas [1994] 1 WLR 129, 137, CA, show. And, as stated earlier in this judgment, I held at the hearing last September that there was no reason why, in a non-contractual case at least, relief could not be sought in relation only to part of the property transferred subject to a vitiating factor and not all of it.
...
[23] In the present case the transfers to the trustees of the registered estates in Seamer Grange Farm, Harker Hill and Fox Covert were all contained in separate forms TR1. Each transfer had a different transferor or transferors, because the legal ownership of each parcel was different. Each was therefore self-contained and entirely severable from the others. Each transferor could make an independent decision about whether to apply for relief from the effect of the mistake, or not." (Bainbridge v. Bainbridge [2016] EWHC 898 (Ch), Master Matthews)
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"[46] Returning to rescission, I consider that the claimants are entitled to the last alternative head of relief claimed in the amended Particulars of Claim, namely an order setting aside clause 2.1(c) of the October 2008 Appointment. Mr and Mrs Kennedy and Mr Sturrock have all given evidence that, if they had been aware of their mistake, they would have omitted clause 2.1(c) from the October 2008 Appointment. That is a self-contained and severable provision in the deed. There is authority that there cannot be partial rescission of a contract; it must be set aside as a whole and not only as to part: see De Molestina v Ponton [2002] 1 LL Rep 70, 286-289 and the cases cited there. That limitation makes sense in a contractual context and as preventing the court in effect imposing a different contract to the one the parties actually made. I see no reason, however, why that limitation should apply to a self-contained and severable part of a non-contractual voluntary transaction." (Kennedy v. Kennedy [2014] EWHC 4129 (Ch), Etherton J)​
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- Part to be rescinded must be severable
"[43] If the Appellant were no longer to be a trustee of the Settlement, nothing else in the DORA needs adjustment, or does not work, or ceases to make sense. So there is both verbal and substantive severability.
[44] I therefore conclude that the Appellant's appointment (or strictly, given my analysis above, her acceptance of it as signified by her signature) was a self-contained and severable part of the DORA and liable to be rescinded for undue influence if the other requirements of that are satisfied, as they are in this case."(Mackay v. Wesley [2020] EWHC 3400 (Ch), Meade J)
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- No rectification by the back door (rescinding one transaction on condition another is entered into)
"[41] I reject the concept that the existence of the particular undertakings proposed in the present case should have a more general impact on whether or not I should order rescission. If such an impact was made by the undertakings, I consider that I would in substance be allowing rectification or something approaching it in circumstances where a case for rectification did not exist. That is something which in a case such as the present the law does not allow. The point was decided by Sir Andrew Park in Smithson v Hamilton [2007] EWHC 2900 (Ch) at paragraphs 61 – 80. This decision was not affected by the subsequent compromise of that case effected with the assistance of the Court of Appeal ([2008] EWCA Civ 996). At paragraph 61 Sir Andrew Park summarised his view as follows:
"The key points which I make in this part of my judgment are the following. The nature of the mistake in rule 3.5.2.1 was such that it could only be corrected by changing the rule, as opposed to nullifying it. The only way to change the rule retrospectively was by an order of rectification. That could only be achieved if the circumstances of the case qualified for rectification, but they did not. Where the rule in Hastings-Bass applies the effect is not to change something that trustees have done, but rather to set it aside altogether. But in this case rule 3.5.2.1 needed to be changed, not set aside. The claimants seek to navigate round this obstacle by their undertaking that, if the court sets the rule aside, they will make an amendment which introduces a new rule 3.5.2.1 that does not suffer from the mistake contained in the present one. This is rectification by the back door, and in my judgment it is not an acceptable way for the court to proceed."" (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
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Restoring parties to position prior to transaction
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- Not absolute in relation to non-contractual voluntary transaction
"[62] The fact that the Trust has now distributed most of the assets is not necessarily a bar to the availability of recission. Indeed, that was the position in Pitt v Holt itself, where almost all of the trust assets were distributed before it came before the court and rescission of the transfers into the trust was still ordered." (Abadir v. Credit Suisse Trust Ltd [2021] EWHC 2573 (Ch), Chief Master Shuman)
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"[162] I consider that some of what might be termed the ancillary rules as to rescission in the context of the rescission of contracts only carry across in a more or less modified form to rescission of voluntary transactions for mistake under the principle in Pitt v Holt. Specifically I consider that in the case of a voluntary disposition the rules as to affirmation, change of position, and the possibility of complete or near complete or equivalent restitution and counter-restitution are not absolute. They are all matters which can be taken into account in an overall assessment of whether it would be unjust, unfair or unconscionable to leave the mistaken disposition in place.
...
[165] As a matter of authority, the decision in Pitt v Holt itself is authority for the proposition that rescission of a voluntary transaction may be ordered, notwithstanding that complete restitution is impossible. Very briefly, for present purposes the relevant facts of Pitt v Holt were that by mistake some £800,000 worth of assets had been put into a "Special Needs Trust", referred to as a "SNT". By the time the mistake was realised and an application was made to set aside the SNT and the transfers into it, there were only a few thousand ponds left in the SNT. The bulk of the fund had been spent by the trustees in accordance with the terms of the SNT. In particular in paying for care for the principal beneficiary." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
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"[46]...There is authority that there cannot be partial rescission of a contract; it must be set aside as a whole and not only as to part: see De Molestina v Ponton [2002] 1 LL Rep 70, 286-289 and the cases cited there. That limitation makes sense in a contractual context and as preventing the court in effect imposing a different contract to the one the parties actually made. I see no reason, however, why that limitation should apply to a self-contained and severable part of a non-contractual voluntary transaction. In such a situation the allied principle that rescission can only be granted if both sides can substantially be restored to their pre-contractual positions is irrelevant. Again, no authority was cited to me on this point one way or the other. In the absence of authority to the contrary, I can see no reason in principle why, on the facts of the present case, clause 2.1(c) should not be set aside for mistake pursuant to the principles in Pitt v Holt." (Kennedy v. Kennedy [2014] EWHC 4129 (Ch), Etherton J)
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- Consider effect on recipient as a factor in deciding whether unconscionable not to set aside and what order to make
"[163] I consider that the fourth requirement for the principle of Pitt v Holt to apply, that is that it must be unjust, unfair or unconscionable to leave the mistaken disposition in place includes within it a requirement to assess the impact of setting aside the transaction on the terms and conditions on which it might be set aside. Thus if a particular order would operate unfairly on a voluntary recipient, that would be an important and frequently a conclusive factor in deciding that it would not be unjust, unfair or unconscionable to leave the mistaken disposition in place. However, I consider that the impact of any relief and of the terms of any condition or counter-restitution which might be required also needs to be considered as a separate matter with a view to ensuring that in all the circumstances the order would operate justly and fairly. This follows as a matter of principle and authority.
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[164.3] Rescission of voluntary transactions for mistake under the principle of Pitt v Holt is an equitable remedy and it should not be granted in such a way or on such terms that would operate unjustly, unfairly or unconscionably." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
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- Court may require undertakings as a condition of relief
"[66] I accept that the court has power to impose terms on granting rescission. The question is whether I should exercise my discretion to do so. The Appointments were made over 8 and 9 years ago respectively, after the trustees had taken into account the relevant considerations at that time. Those considerations may well be different 8 or 9 years later. Neither the court nor the trustees are fully appraised of the considerations that apply now. In those circumstances, the court has no proper evidential basis on which to decide whether it would right to impose the terms Lewis' counsel contends for." (Hopes v. Burton [2022] EWHC 2770 (Ch), Master Clark)
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"[172] The important point for present purposes is that made by Lord Walker at paragraph 141 where he said that but for Mrs Pitt's solicitors' letter, the court might, if minded to grant relief, have required an undertaking to the same effect as the one that Mrs Pitt and Mr Shores volunteered by that letter. Similarly in the present case, if I set aside the transfers to the trustees, I might, as a condition of making such an order, require an undertaking that no personal claims are made against them or that no other personal or proprietary claims arising out of the transactions are made by the Claimants.
...
[175] In something of a reprise of what I have said above about the terms proposed in the draft consent order, I note that, at least in a contractual context, the conditions imposed by a court in relation to a proposed rescission and the terms as to counter-restitution must be such conditions and terms as are necessary to ensure restitutio in integrum (TSB Bank Plc v Camfield [1995] 1 WLR 430 (CA)). I have already indicated that restitutio in integrum is not an absolute requirement in relation to rescission for mistake under the principle in Pitt v Holt. However, any terms and conditions imposed on an order for rescission should at least so far as possible be aimed at putting the parties against whom rescission is ordered substantially into the positions they would have been in if the mistaken transaction had not taken place. In my judgment this follows from (i) the very meaning of the word "rescission" as a setting aside; (ii) analogy with the contractual rescission cases; (iii) the impermissibility of allowing rectification in disguise; (iv) the need for there to be some practical control on the scope of the terms and conditions imposed and (v) the need to do that which is just and equitable." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
- Counter-restitution payments where property on which non-set aside funds were spent to leave the trust
"[182] I have held that the Non-Voidable Payments to the trustees should not be set aside for mistake. It follows that they and funds from any other sources of the Trust Fund which are not susceptible or potentially susceptible to tracing claims by the Claimants were intended to be held on the terms of the Trust. They were also intended to be spent, at least in part, on improvements to the property for the benefit of the Trust and its beneficiaries. I consider it just fair and conscionable that in setting aside the original £4.1 million payment and the Additional Mistaken Payments, counter-restitution should be made in respect of those intended benefits to the Trust. The more difficult question is whether that counter-restitution should be in respect of (i) the amounts of the Non-Voidable Payments and funds from any other sources of the Trust Fund which are not susceptible or potentially susceptible to tracing claims by the Claimants, possibly plus interest, or (ii) the amount by which their expenditure increased or has increased the value of the property. I consider that it should be the former.
[183] If the property had always been owned beneficially by the Claimants it is almost certain that the Non-Voidable Payments and funds from any other sources of the Trust Fund which are not susceptible or potentially susceptible to tracing claims by the Claimants would never have become assets of the Trust at all because on the hypothesis under consideration the Trust would not have come into existence or at least money would not have been out into it for the purpose of expenditure on the property. However, the payments were made and were intended to be held on the terms of the Trust. Hypothetical trustees having those funds in their hands and knowing that the property was or would become vested beneficially in the Claimants would not have spent the funds on the property and would have retained or used them for Trust or other Trust purposes. In my judgment that means that in unravelling what has occurred the full amounts of the expenditure of those funds should be provided to the trustees by way of counter-restitution, not the increase in the value of the property attributable to their expenditure." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
- Conditional order of rescission
"[190] Where an order for rescission imposes conditions and requirements as to counter-restitution on the applicant, the order usually takes the form of a conditional order for rescission, the condition being as to the satisfaction of the specified conditions and requirements as to counter restitution." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
Affirmation after discovering mistake not necessarily a bar
​"[166] The decision in Pitt v Holt is also authority for affirmation not necessarily preventing rescission. Thus, in Pitt v Holt, after the mistake was discovered, the SNT continued to be administered and Mrs Pitt in her capacity as the receiver of the beneficiary of it continued to receive and apply payments from the SNT, but that did not prevent the SNT and the transfers onto its trusts from being set aside. No argument was addressed to me about affirmation in the present case. If there was affirmation by the Claimants, I consider that it would not necessarily prevent my ordering rescission if I could make an order which did not operate unjustly, unfairly or unconscionably." (Rogge v. Rogge [2019] EWHC 1949 (Ch), Deputy Master Henderson)
- Rescission conditional on corrective tax returns being submitted to HMRC to declare income from subject-matter
"[25] There is one other loose end. If the settlement is set aside the property is to be treated as having at all times belonged to Mr Wright and to Mrs Wright respectively. If that is so they must submit the appropriate revised tax returns reflecting the income received from the assets purportedly gifted into the discretionary trust fund and the bank will have to recover any tax which it paid on the income under the putative discretionary trust. As a condition of granting rescission I shall require each of Mr and Mrs Wright to give an undertaking forthwith to submit corrective returns to HMRC." (Wright v. National Westminister Bank [2014] EWHC 3158 (Ch), Norris J)
Laches (delay in seeking a remedy)​
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- Not applied where difficult to identify correct position and, in any event, no detrimental reliance
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"[64] I have touched on the doctrine of laches. It simply does not arise in this case. I cannot begin to imagine the complexity of trying to unravel the background to this case without full disclosure and full documentation. There has been no delay between discovering the mistake and bringing the claim to court in my view. Even if I am wrong on that, then I accept the point that Mr Sykes QC makes about the need for detrimental reliance for the doctrine of laches really to bite. There is no detrimental reliance stemming from any delay and I am not satisfied, even on the factual background, that there has been any delay." (Abadir v. Credit Suisse Trust Ltd [2021] EWHC 2573 (Ch), Chief Master Shuman)
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Equity does not act in vain
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- Sufficient that there is an issue capable of being contested
"[140] What the Court of Appeal decided in Racal was that it is sufficient, even for the closely-guarded remedy of rectification, that there is a genuine issue capable of being contested, even if the parties decide that they will not in fact contest it. The test for rescission on the ground of mistake cannot be stricter than that." (Pitt v. Holt [2013] UKSC 26)
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See further N2-10b: Rectification
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- Change the trusts on which balance is held and genuine tax consequences
"[70]...Here, as I have already mentioned, they have not sought to play any role in the proceedings and I am entirely satisfied this is not a case where I need to withhold relief on public policy grounds, nor is this a case where it would be pointless or in vain in granting relief. The grant of relief will have very real consequences, it will change the trusts on which the balance of the fund was held, and it will have genuine tax consequences as well." (Smith v. Stanley [2019] EWHC 2168 (Ch) David Rees QC)
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- Removal of liability to tax may be the only consequence
"[26]...(11) it is not pointless, nor is it acting in vain, to set aside a transaction and to remove a liability to pay tax, even where that is the principal, or the only, effect of the setting aside: [136]-[141].
...
[46] HMRC next submitted that the court would be acting in vain by making an order of rescission. This was on the basis that it was open to the Claimant and the First Defendant under the terms of the settlement, and without any order of the court, to vest the property in themselves beneficially. However, if they did so they would not avoid the liability of the Claimant to pay inheritance tax. A court order for rescission would remove that liability from the Claimant. In those circumstances, the court would not be acting in vain." (Van der Merwe v. Goldman [2016] EWHC 790 (Ch), Morgan J)​​
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- Alteration as to who will be liable for any tax
"[32] Similarly, the fact that the rescission sought will save tax is not a reason for not granting it. Granting the relief will restore the parties to the position which s.142 permits them to be in. I also accept that there is in this case a genuine issue capable of determination between the parties, as the effect of granting rescission will be to render Mrs Alston's estate liable to repay to the Trust the sums paid to her pursuant to the DoA." (Payne v. Tyler [2019] EWHC 2347 (Ch), Master Clark)​
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RESCISSION IN OTHER JURISDICTIONS
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Guernsey: same test
"[7] The parties also agreed that the issues relevant to the Application are:
“AGREED ISSUES ï‚·
Under the law of Guernsey, there is jurisdiction to set aside a voluntary transaction (such as the Distribution) where it has been made as a result of a mistake. ï‚·
The principles established by the English Supreme Court in Pitt v Holt [2013] UKSC 26 will be highly persuasive in Guernsey. ï‚·
In making the Distribution in reliance on the Advice, which was incorrect, the Respondent was mistaken as to the tax consequences of it. ï‚·
The Respondent’s mistake was causative. ï‚·
A voluntary disposition made as a result of a mistake is not void, but may be set aside by the Court in the exercise of its discretion.
...
[20] Counsel are agreed that the leading decision is that of Pitt which, I also agree, is highly persuasive in this jurisdiction and I know of no reason why, under Guernsey law, we should not apply the principles set out in the judgment of Lord Walker of Gestingthorpe.” (Gresh v. RBC Trust Company Guernsey Judgment 6/2016, Sir Richard Collas)
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- Relief granted for transfer of shares to trust
"[77] Given the circumstances which led Mrs Whittaker to transfer the shares to CFL, it would be not be right for CFL, as the trustee of remuneration trusts, to keep the shares for the benefit of the other beneficiaries of the trusts, or to claim any such entitlement to do so. CFL is a member of the Concept Group. Pan Continental was acting as agent of the Concept Group when it sold the idea of the remuneration trust arrangements to Mrs Whittaker. Pan Continental’s team were ultimately responsible for inducing Mrs Whittaker to enter into this fundamentally flawed and misconceived trust arrangement, for which they received over £1 million in fees. As for the beneficiaries of the remuneration trusts they are all volunteers, and they have not sought to oppose the Application." (Whittaker v. Concept Fiduciaries Limited 15/2017 Amanda Tipples QC)
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- Relief refused for request for pension lump sum based on mistake re tax (not unconscionable)
"[55] The legal test to be applied is that laid down by the Supreme Court in the judgment delivered by Lord Walker in Pitt and summarised by the Chancellor in Kennedy. On the agreed facts, the Trustee acceded to a request for the Applicant to distribute to him a lump-sum from the pension trust it held on his behalf. In requesting the distribution, both the Trustee and the Applicant believed the tax advice he had received to be correct in that he would not pay tax provided that the lump sum was not remitted to the UK. In fact, the distribution was incorrect because it is only a pension i.e. periodic payments as opposed to a lump sum that would be tax-free even if the lump sum were not remitted to the UK. Had the Trustee and the Applicant correctly understood the tax position, the Trustee would not have made the distribution. The incorrect tax advice was the central factor in the transaction; it was basic to it. The Applicant is now faced with a tax liability of 40% of the lump sum, it being taxable to income tax at the highest rate. He was not seeking to pursue an aggressive tax-avoidance scheme which the court would not want to support for reasons of public policy.
[56] The only person affected if the distribution were not to be set aside would be the Applicant. Unlike the other cases referred to by Advocate Davies that have been decided since Pitt, there are no other family members involved and no other third party (apart from the Revenue). The unconscionableness (or injustice or unfairness) of leaving the mistake uncorrected has to be viewed objectively.
[57] In all the circumstances and having regard to the principles I have set out in this judgment, my decision is that it would not be an appropriate exercise of the Court’s jurisdiction to set aside the distribution. It is perhaps unfortunate for the Applicant if he will have to pay the tax to which he has been assessed (particularly if he is unable to pursue any remedies against his tax adviser) but it is not unconscionable, unfair or unjust in the sense described in Pitt and the other cases reviewed if he should have to do so. It is not unconscionable (unjust or unfair) that he should have to retain the proceeds of the distribution made by the Trustee to him." (Gresh v. RBC Trust Company (Guernsey) Ltd 6/2016, Sir Richard Collas)
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- Relief granted for transfer of business into trust based on tax mistake
"[45] Given the consequences about which they were not advised, I was satisfied that each of them had made a grave mistake. Their shareholdings represented a significant part of their personal assets. In each of the Applicants’ cases, I was further satisfied that they made this mistake as a result of believing that they would be obtaining taxation benefits that were illusory or nonexistent. Consequently, they did not derive the tax benefits they envisaged when making the transfers. I was, therefore, satisfied that there were serious consequences for each of the Applicants where the heart of the transaction was to achieve tax benefits that are not available in the way that their advisers led them to believe they would be.
[46] In all those circumstances, I was also satisfied that it would not be right for the Respondent to retain the shares that had been transferred to the Remuneration Trust, in the sense that I regarded it as unjust as against the Applicants, and so unconscionable. I noted that the Respondent had expressed its neutrality throughout." (Samspon v. Estera Corporate Trustees (Guernsey) Ltd [2019] GRC 075, Richard James McMahon)
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- Query harsher approach to unconscionabiltiy
"[186(6)] In this case, even assuming in favour of the beneficiary that the pre-conditions at (3) are satisfied, the claim fails at the final stage as the court does not find it unconscionable that the impugned transaction should stand. M does not require the court to exercise a special jurisdiction to protect him against the consequences of his Trustees’ failing to take tax advice about a transaction which he instigated, because he had such protection; the Trustees advised him that he should take his own tax advice (and he did so). He also has other potential remedies for the damage he has suffered. This is not a case of any wholly innocent and unconnected beneficiaries suffering major prejudice. The very size of the tax imposition naturally provokes sympathy for M, but in all the circumstances of this case, that is not enough." (M v. St Anne's Trustees Limited 1/2018, HH Hazel Marshall QC - in relation to breach of duty by fiduciary)
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- Court paying close attention to undue delay
"[47] I paid close attention to the timing of the Application and whether it could be said that there was any undue delay in seeking to set aside the transactions. I decided that there was not because it had inevitably taken some time for the Applicants to take their own advice as to what had happened. Initially, they continued to deal with those who were responsible for the establishment of the trust, including Mr Auden, so any relevant period would only be once that relationship ended. I noted that the ability to take capital out of the Trust had been clarified in 2012, but that it was not then of immediate concern. The problems came into sharper focus in 2016, when Leonie was informed that the large dividend she wished to take could not be achieved. Although two years to get around to making the Application is a fairly long time, in the circumstances of this Trust, I was not persuaded that it was so long as to deprive the Applicants of the relief they sought on the ground of laches." (Samspon v. Estera Corporate Trustees (Guernsey) Ltd [2019] GRC 075, Richard James McMahon)
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