02 June 2014
In the Matter of the E Trust and the F Trust: Mistake
This case concerned an application by the Representors, NS and his mother WS to set aside the E Trust on the grounds of mistake. The application was brought by Carey Olsen Advocate and Partner, Andreas Kistler.
The E Trust was established on 1 August 2001 pursuant to an instrument made between WS, who was believed at the time to be UK resident but non-domiciled, and the Trustee. The trust was governed by Jersey law. The initial trust fund was in the sum of £1,000 which was provided by WS. The beneficiaries of the Trust were NS, his children and remoter issue and his two sisters. NS’s wife KS, was added as a further beneficiary in 2005.
Shortly after the trust was established NS transferred shares in a property investment company to his mother and she accepted those shares on the basis that she would settle them on trust. NS understood, from the tax advice received, that to do so would allow him to save tax in the United Kingdom.
In 2009 NS decided to establish an estate agency company, the shares of which were to be held in another Jersey trust, the F Trust, which was settled by NS’s UK non-resident, non-domiciled uncle for the benefit of NS and his family. However, NS received advice that it would be better from a tax perspective if the shares in the property investment company were transferred from the E Trust to the F Trust. On 15 December 2010 the Trustee of the E Trust exercised its powers under the trust to appoint the entire issued share capital in the property investment company to itself as Trustee of the F Trust.
Contrary to the tax advice that NS had received, the establishment of the E Trust gave rise to disastrous inheritance tax and capital gains tax consequences, not least because he, as a UK resident and domiciled individual, would be treated as the settlor of the shares in the property investment company which had increased in value substantially from the initial settlement.
The Court accepted that it could apply the established approach under Article 11 of the Trusts ( Jersey) Law 1984 (“Trusts Law”). In doing so, the Court did not need to consider the application of the recently enacted Article 47E of the Trusts Law which was considered in re the Strathmullan Trust  JRC 0561 (Carey Olsen's briefing note on this case can be accessed here
). The Court accepted that the Representor’s contention was that the E Trust itself should be set aside as having been established by mistake. The Court applied the well settled test for mistake under Jersey Law as set out in the S Trust  JLR 375 which was to ask the following questions:
- Was there a mistake on the part of the Settlor?
- Would the Settlor not have entered into the transaction “but for” the mistake?
- Was the mistake of so serious a character as render it unjust on the part of the donee to retain the property?
The Court accepted that it was settled that a mistake about the tax effects of a particular transaction can be treated as a relevant mistake for the purposes of Article 11 of the Trusts Law.
The Court accepted that the transfer of shares in the property investment company from NS to WS and the subsequent transfer by her of the shares to the Trustee of the E Trust was essentially one and the same transaction with the establishment of the E Trust itself. It was also equally clear that NS had acted at all times on the advice of his tax advisors. Accordingly, the Court was satisfied that the Settlor had made a mistake in the context of the arrangements to establish the E Trust. The purpose had been primarily the achieving of tax advantages. In fact, the arrangement had given rise to disastrous tax consequences for NS who the Court accepted was the real Settlor of the E Trust. It was also clear that NS would never have established the trust had he known the true position. Finally, the Court accepted that it would be unjust for the Trustee (which supported the application by the Representors) to retain the trust property. All of the beneficiaries, including the Advocate appointed to represent the interests of the minor beneficiaries, supported the application.
The Court ruled that the E Trust was to be set aside. It followed, in accordance with the approach set out in the Strathmullan Trust, that the transfer of shares in the property investment company from NS to WS and subsequently to the Trustee of the E Trust, which the Court considered to be one transaction, should also be set aside. Applying the approach in the S Trust, the Court ruled that the subsequent transfer of shares in the property investment company from the E Trust to the F Trust must also be set aside as the Trustee of the E Trust never properly had the shares in their hands. Accordingly, the Trustee held the shares in the property investment company on bare trust for NS.
This judgment is a further orthodox application of the existing, well settled principles of equitable mistake established in Jersey law. The case is notable for its application of previous authority allowing steps preliminary to establishment of the Trust to be set aside if they are closely related and the setting aside of subsequent voluntary transfers by the Trustee of the E Trust.
Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.
© Carey Olsen 2014