A&R Trust & Estate Disputes

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A&R. Oops! Out of Jail Again…

Philip Anton Van Der Merwe v (1) Deborah Lynne Goldman (2)The Commissioners For Her Majesty’s Revenue and Customs

Background

Mr Der Merwe and Mrs Goldman were husband and wife.  They owned a property together and had decided to transfer the sole title to the property to Mr Der Merwe.  Subsequently Mr Der Merwe transferred the title to himself and his wife, Mrs Goldman as joint owners pursuant to the settlement of the property into a trust for themselves and their children and remoter issue.  The settlement and transfer were made on 27 March 2006, just 5 days after the Budget of 22 March 2006 which heralded in the changes announced to the IHT treatment of relevant property trusts and subsequently enacted (with retrospective effect from 22 March 2006) by the Finance Act 2006.

They were both caught out by the Finance Act 2006 and so became liable to pay inheritance tax at the rate of 20% of the value of the property on 27 March 2006 and became liable to pay the further 10th anniversary charge at the rate of 6% of the value of the property.  In consequence Mr Der Merwe became liable to pay tax of 20% of the March 2006 value of the property, of between £1.3m and £1.4m, together with interest of £60,000 plus and possible penalties for late payment.  He also became liable on 27 March 2016 to a 10-year anniversary charge of 6% of the then value of the property of about £2m.

The arrangement had been professionally advised upon and sought to take advantage of the tax treatment of such trusts before the Finance Act 2006.

Neither Mr Der Merwe and Mrs Goldman were aware prior to 27 March 2006, nor indeed for many years later, of the budget announcement on 22 March 2006 to the effect that a settlement of this kind, created on or after 22 March 2006, would be a chargeable transfer for value.  At the time of the transactions, they both believed that there would be no liability for tax.  Mr Der Merwe only became aware of the tax consequences of the settlement and transfer in August 2012 and set about proceedings to set aside the arrangement.

Law of Mistake

The case concerned an analysis of whether the application to set aside the arrangement could be based on mistake under common law rules (which apply to mistakes under contract) or mistake under equitable rules (which apply to gifts).  For the purposes of this article we need only mention that the common law rules are more restrictive in their application.  The equitable rules were set down by the Court of Appeal (approved by the Supreme Court) in Pitt v Holt [2013] UKSC 26; [2013] 2 AC 108 as distilled in Kennedy v Kennedy [2014] EWHC 4129 (Ch):

  1. There must be both a distinct and causative mistake as distinguished from mere ignorance or inadvertence (a “misprediction” relating to some possible future event). However, forgetfulness, inadvertence or ignorance can lead to a false belief or assumption which the court will recognise as a mistake.
  2. A mistake may still be a relevant mistake even if it was due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he or she deliberately ran the risk, or must be taken to have run the risk, of being wrong.
  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 and the court must make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected.
  4. 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 parties agreed that if the common law rules applied then the application would fail on the basis that the criteria required to engage that remedy did not exist on the facts of the case.  Unsurprisingly HMRC argued that the common law rules applied, arguing that the transfer on 24 March 2006 was made pursuant to an agreement to then settle the property on trust on 27 March 2006 (Mrs Goldman’s consideration).  Mr Der Merwe and Mrs Goldman said the equitable rules applied.

The court found that defining cases where the common law rules apply as ‘contract disputes’ was something of a misnomer.  The key criterion distinguishing 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.

In the present case the court found that the transfer of the property to Mr Der Merwe alone was in fact a resulting trust, noting that: “If a person transfers property to a person to hold upon trusts that are to be declared in the future, a resulting trust will arise upon the transfer and will subsist until the trusts have been effectively declared.” (Lewin on Trusts, 19th ed., at para. 8-005).   HMRC’s argument that a contract existed and consideration had been given seemed rather artificial and was rejected.  As the court noted “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”.

Mr Der Merwe and Mrs Goldman had 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.

A&R. Oops! Out of Jail Again…

Philip Anton Van Der Merwe v (1) Deborah Lynne Goldman (2)The Commissioners For Her Majesty’s Revenue and Customs

Background

Mr Der Merwe and Mrs Goldman were husband and wife.  They owned a property together and had decided to transfer the sole title to the property to Mr Der Merwe.  Subsequently Mr Der Merwe transferred the title to himself and his wife, Mrs Goldman as joint owners pursuant to the settlement of the property into a trust for themselves and their children and remoter issue.  The settlement and transfer were made on 27 March 2006, just 5 days after the Budget of 22 March 2006 which heralded in the changes announced to the IHT treatment of relevant property trusts and subsequently enacted (with retrospective effect from 22 March 2006) by the Finance Act 2006.

They were both caught out by the Finance Act 2006 and so became liable to pay inheritance tax at the rate of 20% of the value of the property on 27 March 2006 and became liable to pay the further 10th anniversary charge at the rate of 6% of the value of the property.  In consequence Mr Der Merwe became liable to pay tax of 20% of the March 2006 value of the property, of between £1.3m and £1.4m, together with interest of £60,000 plus and possible penalties for late payment.  He also became liable on 27 March 2016 to a 10-year anniversary charge of 6% of the then value of the property of about £2m.

The arrangement had been professionally advised upon and sought to take advantage of the tax treatment of such trusts before the Finance Act 2006.

Neither Mr Der Merwe and Mrs Goldman were aware prior to 27 March 2006, nor indeed for many years later, of the budget announcement on 22 March 2006 to the effect that a settlement of this kind, created on or after 22 March 2006, would be a chargeable transfer for value.  At the time of the transactions, they both believed that there would be no liability for tax.  Mr Der Merwe only became aware of the tax consequences of the settlement and transfer in August 2012 and set about proceedings to set aside the arrangement.

Law of Mistake

The case concerned an analysis of whether the application to set aside the arrangement could be based on mistake under common law rules (which apply to mistakes under contract) or mistake under equitable rules (which apply to gifts).  For the purposes of this article we need only mention that the common law rules are more restrictive in their application.  The equitable rules were set down by the Court of Appeal (approved by the Supreme Court) in Pitt v Holt [2013] UKSC 26; [2013] 2 AC 108 as distilled in Kennedy v Kennedy [2014] EWHC 4129 (Ch):

  1. There must be both a distinct and causative mistake as distinguished from mere ignorance or inadvertence (a “misprediction” relating to some possible future event). However, forgetfulness, inadvertence or ignorance can lead to a false belief or assumption which the court will recognise as a mistake.
  2. A mistake may still be a relevant mistake even if it was due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he or she deliberately ran the risk, or must be taken to have run the risk, of being wrong.
  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 and the court must make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected.
  4. 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 parties agreed that if the common law rules applied then the application would fail on the basis that the criteria required to engage that remedy did not exist on the facts of the case.  Unsurprisingly HMRC argued that the common law rules applied, arguing that the transfer on 24 March 2006 was made pursuant to an agreement to then settle the property on trust on 27 March 2006 (Mrs Goldman’s consideration).  Mr Der Merwe and Mrs Goldman said the equitable rules applied.

The court found that defining cases where the common law rules apply as ‘contract disputes’ was something of a misnomer.  The key criterion distinguishing 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.

In the present case the court found that the transfer of the property to Mr Der Merwe alone was in fact a resulting trust, noting that: “If a person transfers property to a person to hold upon trusts that are to be declared in the future, a resulting trust will arise upon the transfer and will subsist until the trusts have been effectively declared.” (Lewin on Trusts, 19th ed., at para. 8-005).   HMRC’s argument that a contract existed and consideration had been given seemed rather artificial and was rejected.  As the court noted “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”.

Mr Der Merwe and Mrs Goldman had 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.

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